In a MarketWatch column last March, I discussed the serious threat that cash-out refinances pose for major U.S. housing markets. Eight months later, the problem continues.
In 2005, close to $1.2 trillion was refinanced by homeowners into prime cash-out refis. Roughly $260 billion of that was taken out in cash. The next year, slightly more than $1 trillion of mortgages were converted into prime cash-out refis, of which roughly $320 billion was taken out in cash. How many cash-out refinance mortgages were originated during the bubble period? In April 2018, the Urban Institute published a comprehensive article entitled “What Fueled the Financial Crisis? An Analysis of the Performance of Purchase and Refinance Loans.”
In total, almost 10 million cash-out refis were originated during the bubble years. A CoreLogic report in February 2019 showed just how insane the cash-out refi madness had become by the end of the bubble. It found that by late 2006, many borrowers had refinanced their original cash-out refi more than once. Some had refinanced three times. The average break between refinancing was less than two years.
Serious delinquency problem The Urban Institute article breaks out Fannie- and Freddie cash-out refis that became seriously delinquent by more than 180 days. The rates for 2006 and 2007 refis are quite similar — 16% for 2006 refis and 17% for 2007. The rates are much higher for refis where the loan-to-value ratio was greater than 90 — 29% in 2006 and 23% in 2007.
ChrisJVersace 🤔
A common sense solution to these boom busts in resi would be to have 3Y lockout period to refi/repay. Wld segregate flip financing. It's normal in every other loan AND would fetch a premium from bond investors. Think about it.
We never learn HousingCrisis