While many say government policies aimed at increasing first-time buyer caused the recent housing crisis, however Urban Institute explained why this is not the case, according to its blog by Laurie Goodman.
In fact, new data from the GSEs suggests mortgage purchase originations weren’t at fault at all, but rather, mortgage refinances, according to the blog.
From the blog:
At the height of the boom, mortgages refinances (refis) were more likely to default than mortgages taken out to purchase a home, mostly because many people were treating their homes as ATMs through cash-out refinances. Eighty-four percent of GSE refinances in 2006 and 2007 were cash-out refinances. These refinanced loans suffered from sloppier underwriting, so for any set of observable risk characteristics, these refinance loans defaulted more often than purchase loans.
During the housing crisis, refis were the most likely to fall into default, the blog explains.
This chart from the Urban Institute shows while delinquency rates as a whole did increase from the pre-crisis years, refis performed far worse than purchases.
Click to Enlarge
(Source: Urban Institute)
From the blog:
Since 2009, delinquency rates have been low for all loans. The largest differences in performance between purchase and refi loans were loans originated in the boom period of 2004–08.
Conventional wisdom suggests that refis should be less risky than purchase loans and default less because the borrowers have a known history of payment. So these results are surprising, especially given the stronger credit characteristics of refis, such as lower loan-to-value (LTV) and debt-to-income ratios.