Data indicate prudent cash-out underwriting
The share of cash-out refinances has reached its highest point since 2008, but the growing share is no reason for concern as current numbers indicate prudent cash-out underwriting, according to an analysis by the Urban Institute.
Citing Freddie Mac data, the Urban Institute noted that the share of refinance loans where borrowers increase their loan balance to extract equity from their home stood at 77% of total refinances in the second quarter of 2018.
According to the analysis, cash-out refinances were a primary driver behind the financial crisis. From a 21% share of total loan production in 2001, these loans accounted for 46% by the third quarter of 2015. The Urban Institute said the loans performed worse and had greater losses than purchase loans and rate refinances, even when controlling for credit characteristics.
Despite cash-outs taking their largest share of refinances since 2008, the Urban Institute said this is no reason for alarm.
The Urban Institute said that the cash-out refinance share is strongly correlated with home price appreciation and rising interest rates, with homeowners typically choosing to refinance their mortgage to lower their monthly payment or to extract equity from their home.
Additionally, the cash-out refinance share of total production is in line with historical trends. Looking at the cash-out refinance share of all loans back to 1994, the Urban Institute found that the current share is at or below other periods of rising interest rates and strong home price appreciation.
Finally, borrowers are extracting less equity than they did during the financial crisis. The analysis noted that cash-out dollars as a share of all refinanced originations now stand at 21%, lower than the peak of 31% in 2006.
