that, so it’s actually hard to say,” she adds. “I hope,
though, that there is some slowing before the market
Although refinancing opportunities may shrink fur-
ther in the next few years, the purchase market already
looks to be heading upward. Homeowners who were
able to afford refinancing have already done so at
historically low interest rates, says Aaron Terrazas,
senior economist for Zillow, a real estate data-
services provider. Interest rates on 30-year fixed-rate
home mortgages averaged between 3. 68 percent and
3. 75 percent this past November, Zillow reports.
“Rising interest rates will play more of a role in
putting a dent in overall mortgage affordability, but
there’s a lot of headroom for rates to grow and homes
to still remain more affordable than they were historically,” Terrazas says. “Mortgage interest rates would
need to rise to above 6 percent for affordability to be
worse than it was in the pre-bubble period, and that
looks like a long way off.”
Markets to watch
According to Sam Khater, deputy chief economist at
CoreLogic, Midwest markets such as Chicago, Detroit
and Cleveland are experiencing large amounts of
negative equity due to “the scars and residue of the
Great Recession.” This has filtered into smaller metropolitan areas in states like Illinois, Ohio, Michigan,
Wisconsin and Iowa.
Negative equity across the country, however, declined by about 3 percent in the past third quarter —
both year over year and from the prior quarter — so
it’s possible the Midwest and other regions that are
According to Fannie Mae’s housing fore- cast from this past December, refinancing continues to decline as a share of overall first-mortgage originations. Refinancing
comprised 47 percent of single-family home mortgages
during first-quarter 2017, and that is expected to drop
to 28 percent by the end of 2018, equating to a loss of
$73 billion in refinanced loans in less than two years.
On the heels of another interest rate hike by the
Federal Reserve this past December — the third
increase in 2017 — homeowner appetites for loan-refinancing products are understandably lower.
Fannie Mae expects refinances to be 40 percent of all
first mortgages in first-quarter 2018.
For some lenders, however, there isn’t a lot of anxiety.
That’s because an increase in purchase loans is likely
to help offset revenue losses on the refi side. Purchase
loans were valued at $217 billion during first-quarter
2017 and could reach $299 billion in fourth-quarter
2018, Fannie Mae predicts.
“From a mortgage standpoint, I think there’s a lot
of players in this market that have been making great
money off the refinances and the artificially low rates,”
says Kristy Fercho, president of mortgage for Flagstar
Bank. “I think it’s a return to normal for us.”
Lenders like Flagstar also are benefiting from huge
gains in home equity. CoreLogic, a real estate data-services provider, reports that as of this past third
quarter total U.S. home equity jumped by $870.6 billion, or 11. 8 percent, year over year. So, products like
home equity loans and home equity lines of credit
(HELOCs) are on the rise. Flagstar, which originated
$50 million in home equity products during third-quarter 2016, saw that number nearly double, to
$94 million, during third-quarter 2017.
The average homeowner gained almost $15,000
in equity year over year as of the past third quarter,
CoreLogic reports. Homeowners in California, Colorado, Hawaii, Nevada, Oregon, Utah and Washington
recorded an average bump of $22,000 to $45,000 in
equity during the period.
Fercho says she is concerned about West Coast markets overheating and pricing out prospective homebuyers. This could benefit a wide range of Midwest
markets, however, as many metropolitan areas there
still have a large number of homes with negative
equity, meaning the homes are “underwater” and
worth less than what is owed on the mortgage.
“As far as [the West Coast markets] slowing down
anytime soon, I’m certainly not a fortune teller around
struggling with underwater homes will rebound fairly
soon, Khater indicates.
“The one thing these markets all have to their advantage relative to just about anywhere else in the
U.S. is, they’re affordable,” Khater says. “And that’s
becoming a big issue. If you look at the housing markets today, about one-third of them are unaffordable.
“The ones that are affordable are all in the Midwest,”
he adds. “So, that’s a big deal because in the past most
folks used to move because of opportunity. But today,
they tend to move for affordability.”
Terrazas agrees, adding that negative equity was an
issue, to some extent, in every major American market
in the aftermath of the Great Recession. And certain
areas have simply been slower to recover because of
lower housing demand.
“Markets like Miami … still carry a lot of negative
equity simply because home values fell so far and so
fast that it can’t help but take time to work through
the depth of the problem,” Terrazas says.
For lenders, there is a potential rainbow on the
horizon in the number of homeowners who could tap
into equity. TransUnion, one of the three major credit
bureaus, reported this past October that up to 65 million homeowners could qualify for a home equity loan
or HELOC, based on factors like having a loan-to-value
(LTV) ratio of 80 percent or less. The estimated 10 million
borrowers expected to tap into HELOCs between 2018
and 2022 is more than double the 4. 8 million borrowers
who did so from 2012 to 2016, according to TransUnion.
Fercho chooses to take a glass-is-half-full approach
to the dilemma of reaching homeowners who may be
able to access equity in the next four to five years.
“I don’t know if I’d say there is a challenge to it,” she
says. “I think the opportunity is really to think through
how do you access those borrowers?” ■
By Neil Pierson
rates would need to
rise to above 6 percent
for affordability to
be worse than it was
in the pre-bubble
period, and that looks
like a long way off. ”
Refinancing is down, but homeowner equity is rising
Neil Pierson is editor of Scotsman Guide Commercial
Edition. Reach him at firstname.lastname@example.org or