Last year saw a record-breaking $4.4 trillion in mortgage originations, according to Black Knight, with cash-out refinances surging despite overall refi volume dropping compared to the year before.
Total origination volume in 2021 surpassed the previous high of $4.3 trillion set in 2020 and exceeded Black Knight’s expectations entering the year by a healthy margin. Ben Graboske, president of Black Knight’s data and analytics division, noted that the company’s forecast for last year actually called for a 7% decline in origination volume from 2020, while consensus projections originally thought the decrease would reach a much higher level of 20% to 25%.
Similar to 2020, refinancing led the way in 2021, with last year’s refinance volume totaling $2.7 trillion. That’s down slightly from the $2.8 trillion in refis posted in 2020 as plunging interest rates during the COVID-19 era drove many to reconfigure their mortgages during the early stages of the pandemic. With so many candidates for rate-and-term refinances having taken out new loans in 2020, overall refinance originations fell by 34% with rate-and-term refis plunging by 60% year over year.
Refinance lending, however, was buoyed by cash-out mortgages. The volume of these originations rose by 13% as activity was boosted by still-skyrocketing home values over the course of the year. Of the total refi volume of $2.7 trillion last year, nearly half ($1.2 trillion) came via cash-outs, the most since 2005 and within 1% of an all-time record share.
“What stands out is the 20% [dollar volume] growth in cash-outs over 2021, which accounted for $1.2 trillion in originations last year and $275 billion in equity withdrawn,” Graboske said. “In Q4 alone, homeowners tapped $80 billion – the most in 15 years – while marking the fifth consecutive quarter of more than 1 million borrowers pulling cash out.”
With home prices firmly on the rise, cash-out withdrawals have now doubled over the past two years, with the cash-out share of refinances rising from 36% at the beginning of 2021 to more 60% during the final quarter of last year. In fact, the share of total equity withdrawn reached its highest level in any fourth quarter since the Great Recession — and despite this hefty withdrawal, persistently rising home prices still pushed tappable equity up by nearly $450 billion in Q4 2021.
Moving forward, Black Knight anticipates even more of a shift from rate-and-term refinances to cash-outs, given rising interest rates and the 65% drop in viable rate-and-term refi candidates thus far in 2022. But while homeowners are tapping into home equity to a degree unseen since 2005, Graboske said that they are still doing so with caution.
“Rising home values are resulting in much lower post-cash-out LTVs (loan-to-value ratios) than we’ve seen in recent years – and more than 10 points lower than during the previous peak – while high average credit scores are also helping to lower the overall risk profile of these loans,” he said.
While the average credit score of a cash-out borrower has started to recede (a normal shift in a rising-rate landscape), it remains above 740. And average post-cash-out LTV ratios last year were at 63%, the lowest recorded by Black Knight since it started tracking the metric in 2005.
Moreover, while the current rate of withdrawal as a share of tappable equity is twice what it was during the pre-pandemic days of 2018 and 2019, it is only about half of the all-time high. That figure was posted in 2006, just before the housing market plunged into crisis.
“Now for the bad news: Retention of cash-out refinance borrowers has been notoriously difficult,” Graboske observed. “Even in a quarter that saw overall retention rates hit an eight-year high, cash-out retention was still 8 percentage points lower than for rate-and-term refis.”
Despite “strong improvement,” servicers still lag in keeping cash-out borrowers under the first-lien umbrella, Graboske said. And yet borrowers who switched lenders ended up with average interest rates only 5 basis points below those who stayed with their previous lender or servicer. That’s the smallest gap in two-and-a-half years, implying that while pricing remains an important factor, it’s not the only consideration that borrowers take into account when pulling equity from their home.