Prepayment on ARMs at 12-year high, tappable equity rising

American homeowners have increased their mortgage prepayment activity in recent months thanks to lower interest rates and the spring homebuying season.

Overall prepayment activity in May was at its highest since late 2016 according to a new report from Black Knight which also shows rising levels of tappable equity and refinance candidates.

Its Mortgage Monitor Report reveals that borrowers with 2018 vintage loans are now driving more than twice as much prepayment volume as any other vintage after jumping by more than 300% over the past four months.

“While we’ve observed increases across nearly every investor type, product type, credit score bucket and vintage, some changes stand out,” noted Black Knight Data & Analytics President Ben Graboske. “For instance, prepayments among fixed-rate loans have hewed close to the overall market average, rising by more than two times over the past four months. However, ARM prepayment rates have now jumped to their highest level since 2007 as borrowers have sought to shed the uncertainty of their adjustable-rate products for the security of a low, fixed interest rate over the long haul.”

Tappable equity

We are set for a new high in tappable equity as home prices rise, beating last year’s $6.06 trillion.

Currently at $5.98 trillion, the 44 million homeowners with at least 20% equity in their homes now have an average $136,000 available to borrow before hitting the combined 80% LTV cap.

But slower home price appreciation, especially in the most expensive markets, means that the pace of equity growth has slowed to just 4% in Q1 2019 compared to 5% in the last quarter of 2018 and significantly lower than the 16% seen in Q1 2018.

Refinance candidates

The impact of lower mortgage rates - Freddie Mac’s 30-year average fixed rate fell to 3.73% last week, a three-year low – means a further increase in homeowners who would benefit from refinancing.

There are now 8.2 million refinance candidates, the largest that group has been since late 2016 and a 6.3 million increase from when rates peaked in November 2018.

Among the 8.2 million total are 1.5 million borrowers who only took out their loans last year – more than 35% of all mortgages originated in 2018!

“Early estimates suggest closed refinances rose by more than 30% from April 2019, with May’s volumes estimated to be three times higher than the 10-year low seen in November 2018,” added Graboske.