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50 | M R EP O RT SERVICING THE LATEST O R I G I NAT I O N S E R V I C I N G DATA G O V E R N M E N T S E C O N DA R Y M A R K E T Good News on Negative Home Equity The amount of homes in negative equity fell to the lowest level in nine years, according to a new report. T he amount of homes in negative equity fell to the lowest level in nine years, according to the CoreLogic Equity Report. Additionally, the amount of equity in mortgaged real estate increased by nearly $427 billion in the second quarter of 2019 from the second quarter of 2018, an annual increase of 4.8%. CoreLogic notes that Q2's increase in equity was the lowest such gain in equity since the fourth quarter of 2012. Despite the lower growth rate, borrower eq- uity hit a new high in the second quarter of 2019, and borrowers have gained $5.9 trillion in equity since the end of 2011 when equity stopped declining. The nationwide negative equity share for the second quarter of 2019 was 3.8% of all homes with a mortgage, the lowest share of homes with negative equity since CoreLogic started tracking it in Q 3 2009. The number of underwater properties decreased by 201,000 from the second quarter of 2018 to the second quarter of 2019. By state, Nevada's 1.9-percent- age-point decrease in negative eq- uity between the second quarter of 2018 and the second quarter of 2019 represented the nation's larg- est year-over-year decline, and the drop from a high of 72.7% in the first quarter of 2010 to 3.7% in the second quarter of 2019 represented the largest decline from the peak. On a city level, San Francisco has the largest average amount of negative equity, but the negative equity share is only 0.6%. Miami has the smallest average amount of negative equity, but has a nega- tive equity share of 9.4%, which is more than double the national rate. Earlier this month, Black Knight reported that tappable equity rose for the second quarter in a row, gaining $335 billion in Q2 2019, now at an all-time high of $6.3 trillion. "The not-so-good news is that— in an environment of record-high levels of tappable equity and low interest rates that makes cash-out refinances an affordable option for accessing that equity—servicers are retaining just one in five cash-out borrowers," Black Knight Data & Analytics President Ben Graboske said. "Even though rate-term refis are surging right now, cash-outs still made up some 62% of all refinances in the second quarter. Add to that the fact that borrowers refinancing out of 2012-2017 vintage loans account for nearly half of all refis so far in 2019, nearly 80% were cash-out transactions." DTI's Ties to Mortgage Default Rates With the FHA signaling it may tighten credit, just how much does DTI impact defaults and repayments? I n an effort to reduce future defaults on FHA-insured mortgages, the Federal Housing Administration (FHA) has signaled that it may tighten credit, noting that the debt-to-income (DTI) ratio for FHA-insured loans has been consistently increasing for six years. In a new report, Urban Institute examined how impor- tant DTI ratios are in predicting a borrower's ability to make on-time mortgage payments, and how debt burden impacts ability to repay FHA mortgages. According to Urban, DTI ratios are much less sig- nificant predictors of loan perfor- mance than FICO scores and that many high-DTI loans have strong FICO scores. Additionally, Urban's analysis found that higher-DTI loans do not always have higher serious delinquency rates, and 5.6% of loans with DTI ratios ranging from 0 to 35% have been seriously delinquent at 60 months of age, compared with 7.6% of loans with DTI ratios of 35–45. But for loans with DTI ratios greater than 50, the D90+ rate at 60 months is 6.9%, lower than those with DTI ratios of 35–45. On the other hand, loans with lower FICO scores—and loans with higher loan-to-value (LTV) ratios, for that matter—always have higher serious delinquency rates. The magnitude of impact on delinquency rates is much larger than on DTI ratios, ranging from 3.3 to 12%. For FICO scores, the proportion of loans that was ever D90+ delinquent at 60 months ranged from 3.3% for loans with FICO scores greater than 780 to 12% for loans with FICO scores less than 620, or a factor of 3.5. Urban concludes that there is no question that higher-DTI loans default at higher rates than low- DTI loans, but even in the FHA market, the relationship is weak. FICO scores are much stronger predictors of default than DTI ratios. "Also, it appears that the cur- rent FHA scorecard adequately captures DTI ratios, requiring compensating factors for high-DTI ratios," Urban said. "If the FHA were to place further restric- tions on DTI ratios, it would not benefit the FHA and would make obtaining mortgage credit more difficult for two important groups: millennials with student loan debt and communities of color, who generally have lower incomes." According to Urban, DTI ratios are much less significant predictors of loan performance than FICO scores and that many high-DTI loans have strong FICO scores.