MortgagePolitics & Money

Cash-out refis haven’t been this prevalent since the financial crisis

But unconcerned experts say borrowers are extracting less equity than before

The volume of cash-out refinance loans hasn’t been this high since 2008, but experts say when put into context, there’s no cause for alarm.

According to recent data from Freddie Mac, the share of refinances that involved cash extraction climbed to 77% in the second quarter of 2018. But, the amount of equity cashed out totaled $15.8 billion – well below the $75-$85 billion we saw in the years leading up to the crisis.  

A blog by Washington, D.C. think tank the Urban Institute said that while on its face the growing share does seem worrisome, there is no cause for concern when you break it down.

For one, home price appreciation and rising interest rates play a major role. Home values have been rising an average of 6 to 8%, giving homeowners a major incentive to tap that growing source of wealth.

Plus, with interest rates rising, it’s unlikely that anyone refinancing is doing so to lock in a better rate, meaning it makes sense that the greatest reason to refinance in this environment is to access equity.

Second, the percentage of refinances in the overall number of mortgage transactions is the lowest it has been in years.

“Refinance loans make up such a small share of total loan production – currently below 30% for Freddie Mac – so the cash-out refinance share of all loans is still within a reasonable range and below the dangerous levels of the crisis years,” the authors stated.

Also, other forms of equity extraction – including HELOCs and HECMs – are not experiencing major borrower uptake. “None of these products are growing,” the authors bluntly state, adding that HELOC volume is down 8% from last year, according to the Federal Deposit Insurance Corporation.

Finally, borrowers are taking less equity than before when they cash out, thanks in part to regulations limiting the loan-to-value ratio for cash-out refis.  

“While cash-outs make up the highest share of refinances they have since 2008, this is no reason for alarm,” the authors write. “In an environment of home price appreciation, people commonly tap into their home equity.”

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