Despite falling rates and surging refinance activity, mortgage servicers continue to struggle to retain refinancing borrowers, a report from Black Knight shows.
Typically, mortgage servicers are able to retain about a third of borrowers who refinance but in the fourth quarter of 2019, they only retained one in five borrowers, according to Black Knight’s Mortgage Monitor report.
That’s down from 24% in the third quarter and down from 22% in the second quarter.
The dip comes despite refinance lending hitting a 6.5-year high.
The trend is baffling when considering that the bulk of the increase during the last three quarters has been in rate/term refinances, which are typically easier business for servicers to retain.
“Despite a surge in refinance lending driven by low rates, servicers continue to struggle in their efforts to recapture refinancing borrowers, with only one in five being retained by servicers in the fourth quarter of 2019,” says Ben Graboske, chief economist for Black Knight. “Fewer than one in four borrowers refinancing to lower their rate or term – business which has been historically easier to retain – stayed with their servicer post-refinance in the fourth quarter. A large driver has been a recent failure to retain 2018 vintage mortgages, which goes to show just how quickly lender/borrower relationships can evaporate without the right data and tools for servicers to early on identify clients in their portfolios with sufficient tappable equity, and act to retain them.”
The report highlights the challenges servicers are facing in retaining the business of refinancing borrowers.
“Borrowers who left for ‘greener pastures’ received an average 0.08 percent lower interest rate than those who stayed, strengthening the need for tools to ensure rate pricing is competitive,” Graboske adds. “Retention challenges are even more pronounced among cash-out refinances, for which retention rates fell from 19 percent in the third quarter to just 17 percent in the fourth quarter, the lowest in more than four years. At the same time, cash-out lending hit a more than 10-year high at the end of 2019, with some 600,000 borrowers pulling an estimated $41 billion in equity from their homes, the largest quarterly volume since 2007.”
Black Knight’s data shows that currently about 44.7 million homeowners have equity they can tap via a cash-out refinance or HELOC, with the average homeowner having $119,000 in equity.
“At $6.2 trillion, total tappable equity – the amount available to homeowners with mortgages to borrow against while still retaining at least 20 percent equity in their homes – hit its highest year-end total on record,” Graboske says. “What’s more, the same falling interest rates that have reheated the housing market have also increased the rate of equity growth for the third consecutive quarter.”
Tappable equity grew 9.0% year-over-year in there fourth quarter, the highest such growth rate since the third quarter of 2018.
“Refinance lending is up 250 percent year-over-year, cash-out lending is at a 10-year high and 75 percent of homeowners with tappable equity have first lien interest rates at or above today’s prevailing rate,” Graboske says. “Taking all of this into account, improving the retention and recapture of this business is of critical importance. Data-driven portfolio retention strategies that help determine borrowers’ motivations for refinancing can go a long way in this regard.”
Black Knight’s data shows that as interest rates fell during 2019, an increasing share of homeowners reduced their interest rate as part of a cash-out transaction, helping to offset some of the cost of borrowing against their equity.
In fact, in the fourth quarter, approximately 76% of homeowners were either able to keep their interest rate the same or, in many cases, significantly decrease their interest rate through cash-out refinancing, the largest such share since there fourth quarter of 2016.
This includes 50% who decreased their interest rate by at least 0.50% and 25% who decreased their interest rate by 1% or more.