Despite the surge in refinance activity, mortgage servicers are struggling to retain their customers after a refi, according to the latest Mortgage Monitor report from Black Knight.
Refinance lending rose to a 6.5-year high in fourth-quarter 2019, a complete turnaround after plummeting to an 18-year low in the same quarter one year earlier. In fact, according to Black Knight data, refinance lending increased by 250% year over year in the past quarter.
Rate-and-term refinances made up the bulk of the bounce back, driving the cash-out share of refinances below 50% for the first time in three years. Yet even with rate-and-term refis carving out the majority of the market share in the past quarter, cash-out mortgages grew to their highest level in more than a decade. About 600,000 homeowners pulled out $41 billion in equity through cash-out refinances in fourth-quarter 2019 — the largest quarterly volume since 2007.
But with mortgage activity swelling, servicers are struggling to recapture customers. In fourth-quarter 2019, only one in five borrowers remained with their servicer after refinancing, Black Knight reported.
Among rate-and-term borrowers — borrowers who have historically had higher retention rates than cash-out consumers — less than a quarter were retained. And among cash-out borrowers, the retention share was even lower, declining from 19% to 17% between the third and fourth quarters of last year to hit the lowest share in more than four years.
“Retention rates rose along with refinance volumes early last year, hitting an 18-month high in Q2 2019, but retention rates have since fallen in each of the past two quarters,” said Ben Graboske, data and analytics president at Black Knight.
“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.”
According to Graboske, borrowers who left for “greener pastures” lowered their interest rate by 0.08% compared to those who stayed with their servicer, highlighting the need for tools to ensure rate pricing is competitive.
Finding ways to solve the borrower-retention challenge is critical considering the large amounts of borrowers with incentive to refinance, Graboske said.
Lenders and servicers should take that there are currently 44.7 million homeowners with equity available to tap through a cash-out refinance or home equity line of credit, Black Knight reported. The average U.S. homeowner has $119,000 in equity. At $6.2 million, “tappable” equity — or the amount available to homeowners to borrow against while still retaining at least 20% equity in their homes — hit a year-end record high.
Additionally, Graboske noted that “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 by 9% annually in the fourth quarter of last year, the highest growth rate since third-quarter 2018.