Cash-Out Mortgage Lending Surges to a 14-Year High, Black Knight Says

Homeowners who refinanced their mortgages in the third quarter extracted more than $70 billion in home equity, a 14-year high, according to a Monday report from Black Knight.

About 54% of refinanced loans resulted in cash going to the borrower, the mortgage data company said. Cash-out lending comprised a larger share of the mortgage market after higher interest rates resulted in fewer people renewing their loans to secure cheaper financing, the report said.

Home-price growth in the third quarter added more than $250 billion to the equity held by Americans, putting the amount of so-called tappable equity – the amount available to borrow against while still retaining the 20% buffer required by most lenders – at a record $9.41 billion, Black Knight said.

That’s 32% higher than the year-earlier quarter and almost 90% higher than the pre-Great Recession peak in 2006, said Ben Graboske, president of Black Knight’s data and analytics division.

The amount of equity gained in the third quarter was "astonishing," Graboske said in a statement accompanying the report.

The typical mortgage holder now has $178,000 available in tappable equity, the Black Knight report said.

“Before we go down the ‘using your home as an ATM’ road of concern, some important points,” the report said. It listed:

• The $70 billion of equity extraction in the third quarter is equivalent to just 0.8% of equity available to homeowners at the start of the quarter, meaning equity was removed at a third of the rate seen in the years before the Great Recession.

• Underwriting standards are much stronger today than 15 years ago, with the average credit scores of cash-out refinance borrowers more than 50 points higher than the last cycle of equity extraction.

• The average borrower’s mortgage debt is now 45% of their home’s value – the lowest total market leverage ever recorded, Black Knight said.

U.S. home prices surged during the pandemic as a result of a Federal Reserve bond-buying program aimed at keeping credit flowing. After the central bank began buying mortgage-backed securities in March 2020, the average U.S. rate for a 30-year fixed home loan four months later dropped below 3% for the first time ever.

In the first week of 2021, the rate hit an all-time low of 2.65%, as measured by Freddie Mac. Last week, the rate was 3.11%.

When interest rates drop, borrowers tend to qualify for larger mortgages because they are vetted using the amount of the monthly home-loan bill they will be required to pay.

Cheaper financing means buyers could bid higher for homes they wanted, amid a shortage of listing properties. That increased the value of real estate even for people who didn't list their homes, because property values are based on so-called comparable sales, meaning the price that similar homes sold for in a neighborhood.