Black Knight: ‘Tappable Equity’ at Record High, But Tax Law Could Change Impact

Black Knight, Jacksonville, Fla., said homeowners’ “tappable” equity reached a record high in the third quarter. But it cautioned that changes under the new tax law could force homeowners to adjust in using that equity.

The company’s monthly Mortgage Monitor said as of Sept. 30, 42 million homeowners with a mortgage have nearly $5.4 trillion in equity available to borrow against, assuming a maximum 80 percent total loan-to-value ratio. More than 80 percent of all mortgage holders now have available equity to tap via a first-lien cash-out refinance or home equity line of credit.

However, the report noted under the recently passed tax reform plan, interest on HELOCs is no longer deductible, increasing the post-tax expense of such products for those who itemize.

“HELOCs have been an attractive option for borrowers to utilize available equity without sacrificing low first- lien interest rates; with interest on these products no longer deductible, the value proposition has changed,” said Black Knight Data & Analytics Executive Vice President Ben Graboske.

Graboske noted in many cases, for borrowers with high unpaid principal balances, taking out low-dollar lines of credit, the math still favors HELOCs. However, for low-to-moderate UPB borrowers taking out larger amounts of equity–assuming interest on cash-out refinances remains deductible–the post-tax math may now favor such products instead, even if it results in a slight increase to first lien interest rates.

“As rates continue to rise and the cost associated with increasing the rate on an entire first-lien balance rises as well, the benefit pendulum will likely swing back toward HELOCs,” Graboske said. “Even so, the change could certainly impact HELOC lending volumes and loan amounts in the coming months and years. To a certain degree, the same question holds true for cash-out refinances, since tax debt for homeowners who will no longer itemize becomes generally more expensive without mortgage interest deduction in the equation. These refinances will likely be an attractive source of secured debt in the future, but increased post-tax costs may have a negative impact on originations. “

Black Knight reported the number of underwater borrowers declined by 800,000 over the first nine months of 2017, a 37 percent decline in negative equity since the start of the year. Only 2.7 percent of homeowners with a mortgage (1.36 million borrowers) now owe more than their home is worth, the lowest such rate since 2006.

“Though still elevated from pre-recession levels, the negative equity rate continues to normalize,” Graboske said. “Even so, home prices in large portions of the country remain below pre-recession peaks.”

The report said while 36 states and 70 percent metro areas have now surpassed pre-recession home price peaks, 43 of the nation’s 100 largest markets still lag behind.

Other report highlights:

–Total U.S. loan delinquency rate: 4.55%, a month over month increase of 2.54%.

–Total U.S. foreclosure pre-sale inventory rate: 0.66%, a month over month decrease of 3.15 percent.

–States with highest percentage of non-current loans: Mississippi, Florida, Louisiana, Alabama, West Virginia.

–States with lowest percentage of non-current loans: Montana, Minnesota, Oregon, North Dakota, Colorado.

–States with highest percentage of seriously delinquent loans: Mississippi, Florida, Louisiana, Texas, Alabama.