• Expert Quote: "Traditional rate-based retention strategies aren't effective for borrowers who are motivated by access to equity" — Bob Hart, President of Mortgage Technology at ICE
• Supporting Data: Cash-outs accounted for 75% of all refinance-portfolio attrition in the third quarter.Overview bullets generated by AI with editorial review.

Servicers are losing business as retention rates drop, signaling a need for more advanced analytics and a better understanding of borrowers.Refinance retention dropped four percentage points to 27% from the second to third quarter, according to the Intercontinental Exchange's latest mortgage monitor report. The retention among rate-and-term refinancers fell nine percentage points to 30%, while cash-out retention held at 26%. Servicers retained just 15% of cash-out borrowers who took out loans in 2019 or earlier.

"Get more advanced with your analytics," Andy Walden, head of mortgage and housing market research at ICE, told National Mortgage News. "Get deeper insight in terms of who's refinancing and why they're refinancing, and really incorporate that cash-out refinance scoring and propensity to refinance into your marketing effort."

Cash-outs accounted for 75% of all refinance-portfolio attrition, which is a harder group to retain. Equity was the clear focal point for borrowers looking to refinance, and servicers who ran an in-the-money analytic off their book missed a large chunk of potential business, Walden added.

"Traditional rate-based retention strategies aren't effective for borrowers who are motivated by access to equity rather than interest rate savings," said Bob Hart, president of mortgage technology at ICE, in a press release Monday. "To retain these borrowers, servicers need better visibility into their equity positions and the ability to engage them before they look elsewhere."

Home equity continues to grow

Borrowers collectively held a record third-quarter high $17.5 trillion in home equity, up 1.4% year over year. Tappable equity that can be accessed while maintaining a 20% cushion rose 1.2% to an average of $204,000 per borrower, a $16,600 jump from a year ago, according to the report.

The number of equity millionaires also hit a third quarter record, as 2.4 million mortgage holders had at least $1 million in equity, a 6% increase from the same period last year. California accounted for 49% of the country's equity millionaires, followed by New York at 8% and New Jersey at 6%, the report found.

"Home equity products, lines of credit and second liens continue to be the focal point for the market that drove the bulk of equity extraction in the first half of this year," Walden said. "Understanding borrowers and where they stand, ... whether they're a cash-out refinance or a home equity line of credit candidate, and making sure you have those pipelines set up and flowing; that's the key part from an equity standpoint." 

In a high-rate environment, cash-outs made up a greater share of refinances, as homeowners gave up historically low mortgage rates and took on higher monthly payments to access equity. Cash-out transactions accounted for roughly 14% of rate locks in recent weeks, while purchase loans represented 80% of rate locks, according to the report.

Adjustable-rate mortgages made up more than 10% of early October rate locks as Freddie Mac's 30-year fixed-rate mortgage surged above 7%. The points-adjusted spread between 5/1 ARMs and 30-year fixed loans expanded from about 75 basis points this summer to more than 100 basis points early last month, further increasing the attractiveness of ARMs. That spread has since narrowed to about 87 basis points, the report found.