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CFPB posts blog entry analyzing cash-out refinancing
On December 18, the CFPB posted a blog entry regarding cash-out refinance mortgages and their borrowers between 2013 to 2023. According to the entry, which noted reflects the authors’ views, and not those of the CFPB, refinance mortgage originations decreased amid 2022’s rapid interest rate hikes, and notably favored cash-out refinances over non-cash-out options. Cash-out refinances involve borrowing significantly more than the amount owed on an existing mortgage, often used for diverse purposes like debt settlement or home improvements. Despite reduced volumes due to rising rates, the post noted that cash-out refinances are “worth monitoring” since they were considered one of the factors that contributed to the 2008 financial crisis.
Analyzing loans from 2013 to 2023 from data in the National Mortgage Database, the blog entry revealed some insights into delinquencies. Some of the findings include: (i) cash-out refinances held a larger share of all refinances when interest rates rose; (ii) borrowers opting for cash-out refinances typically had lower income and lower credit scores compared to those pursuing different refinancing avenues; (iii) borrowers with stronger credit scores showed minimal serious delinquencies irrespective of the refinancing type; and (iv) borrowers with lower credit scores showed similar two-year delinquency rates for both cash-out and non-cash-out refinancing, except for borrowers in 2017, a year marked by rising interest rates and lower credit scores for cash-out borrowers. Based on this last finding, the blog post noted that there may be increased delinquencies among cash-out refinances originated in 2022, a year with similar interest rate increases and decrease in cash-out borrowers’ credit score.
Maximum LTV lowered for FHA cash-out refinances
On August 1, HUD issued Mortgagee Letter 2019-11, which lowers the maximum loan-to-value (LTV) and combined maximum loan-to-value (CLTV) from 85 percent to 80 percent on cash-out refinances for FHA-insured mortgage loans. The letter notes that the total number of cash-out refinance mortgages of FHA-insured mortgage loans has increased 250.47 percent from FY 2013 to FY 2018, and that the FHA therefore has concluded that the reduction in LTV is prudent “in order to strengthen the equity position of cash-out refinances and reduce loss severities in the event of default, [and] stay ahead of any potential future shift in the housing market.” The new LTV is effective for any mortgage loans insured by FHA on or after September 1.