Low interest rates continue to fuel the refinance surge, with prepayments up a massive 132% year over year at the beginning of December.
In fact, according to Black Knight, refinance lending is up 94% over the past three quarters after hitting an 18-year low in the fourth quarter of 2018. In the third quarter of 2019, refinance lending hit its highest level in almost three years.
Unfortunately, despite those highs, servicer retention rates have taken a hit during the refinance boom. After seeing the highest retention rates since late 2017 earlier in the year, only 22% of borrowers stayed with their original servicer after refinancing in the third quarter. On cash-out refinances, servicers failed to retain 81% of borrowers post-refinance. That’s the lowest retention rate within that segment in over two years, according to Ben Graboske, data and analytics president for Black Knight.
Even on rate/term refinances — which have been historically easier borrowers for servicers to retain — servicers lost the business of 74% of borrowers, or nearly three out of four, during the third quarter. The 26% they did retain was down from 29% in the quarter prior.
Retention numbers are further discouraging when considering loan vintages with growing origination shares. Take the 2018 vintage, which has made up an increasing fraction of refi originations as 2019 has gone on. In the first and second quarters of the year, borrowers refinancing out of 2018 purchase loans made up about one-fifth of refinance originations. As of the third quarter, the accounted for nearly one-third of all refis.
But as that share has grown, servicer retention among the 2018 vintage has retreated. Retention rates in the 2018 vintage have fallen from 35% in the first and second quarters to just 30% in the third — the largest drop of any vintage. Retention rates among 2018 loans are still the highest of any vintage, but stark pullback has narrowed the gap.
Black Knight’s data also revealed that motivations differ vary widely between vintages when it comes to refinancing. Borrowers of newer vintages (between 2017-2019) tend to carry much higher balancing and are primarily refinancing to cut their rates. On average, for example, 2018 vintage borrowers carried pre-refi balances of $380,000, while loans from early 2019 had pre-refi balances of $560,000. Just 18% and 21% for these respective vintages took out equity, compared to 52% in the market as a whole.
Homeowners refinancing from vintages between 2008 and 2011, on the other hand, averaged much smaller balances ($160,000-$172,000), and more than 80% of their refinances were cash-outs.
“While refinance activity is up across the board, the characteristics of refinancing borrowers – along with their motivation and ‘trigger points’ to refinance – are anything but uniform,” Graboske said. “Advanced portfolio and market analysis can help servicers better understand changing borrower dynamics and tune their strategies accordingly.”
