With mortgage refinancing activity down 30% between May and September, will homeowners turn to home equity lines for cash?

That is a possibility suggested by the LPS Mortgage Monitor. Via email …

“We have seen prepayments decline by more than 30 percent since May, when mortgage interest rates began climbing approximately 100 basis points to where we are today,” LPS Senior Vice President Herb Blecher said. “As a result, the percentage of borrowers currently in loans with interest rates high enough for refinancing to make fiscal sense has decreased significantly. Over half of borrowers are now ‘out of the money’ with respect to refinancing. In December 2012, the population of potentially refinance-eligible borrowers stood at roughly 10 million. However, refinance activity during that time, along with rising interest rates, have shrunk that pool to just 5.7 million borrowers as of August.

“While higher interest rates may certainly have the effect of tamping down refinance activity, they may actually wind up contributing to a new appetite for home equity loans among homeowners,” Blecher continued. “After bottoming out at the beginning of 2012, home prices are now at their highest levels since 2009, and borrowers who bought or refinanced within the last few years are quite likely to have accumulated additional equity in their homes. Based upon LPS’ analysis of historical borrowing patterns and home value trends, it is possible that we could see an increase in second-lien borrowing among those who have locked in their first mortgages at very low rates and who wish to tap their equity without refinancing into a higher rate.”

Refinancing and Home Equity Activity

Charts from the September LPS Mortgage Monitor

Prepayments Down 30%

50% Ineligible for Refinancing

Loans with Refinancible Characteristics

Mortgages with Second Liens

Historical Trends in HEs

Surge in HE Loans Coming?

A surge in home equity loans depends on three things

  1. Home prices continue to rise
  2. Willingness of borrowers to take out loans
  3. Willingness of lenders to offer loans at low rates

None of the above is a given.

If home prices stagnate or decline, no surge in home equity loans will follow.

Even “if” home prices continue to rise, projections as to what “may” happen if recent vintages follow the 2003 pattern are invalid because attitudes towards borrowing and lending are not the same now as in 2003.

Once attitudes on debt and housing reach a peak and reverse, it takes decades before they peak again.

If home prices continue to rise (a very big if), there will be some increase in home equity loans, but not at a pace we have seen before.

Mike “Mish” Shedlock