Cash-out refinancing is drying up as banks and mortgage lenders tighten underwriting standards to cover the risk of millions of borrowers seeking forbearance on their home loans.
Despite ultra-low interest rates and the need by many homeowners to raise cash because of job losses and economic uncertainty, many homeowners are priced out of the market for cash-out refis, lenders say.
Mortgage lenders have released new rate sheets in the past week showing higher credit scores and loan-to-value ratios plus added fees for cash-out refis. The changes are in response to the Federal Housing Finance Agency's policy last month that excludes cash-out refinancing from the single-family loans that Fannie Mae and Freddie Mac will buy
“Pricing for cash-out loans is so bad that it’s not even worth quoting to a borrower — they have shut this market out,” said Logan Mohtashami, a senior loan officer at AMC Lending Group in Laguna Hills, Calif. “No one wants the business so lenders price the mortgage rate on a refinance so high that it doesn’t make sense to cash out.”
Last week, Flagstar Bank in Troy, Mich., announced that homebuyers will pay a price adjustment on a cash-out refi of 5% of the loan amount. The fee does not apply to home loans originated by the $26.8 billion-asset bank’s own retail loan officers, a Flagstar spokeswoman said.
PennyMac Loan Services, in Westlake Village, Calif., eliminated cash-out refinancing for loans with LTV ratios higher than 80%, consistent with Fannie Mae guidelines. A homeowner with a credit score of 700 to 720 and 20% equity in a home would pay a rate of more than 6% to tap their equity; borrowers with a 640 credit score would pay a rate of more than 8%. PennyMac, one of the largest nonbank lenders, also is charging a $1,000 fee for loans it purchases from wholesale brokers and independent mortgage bankers.
Wells Fargo was the first bank to completely eliminate all cash-out refis, in early April, said Tom Goyda, a Wells spokesman. JPMorgan Chase raised overall underwriting requirements last month to a minimum 700 FICO and 20% LTV.
“If you can’t get a cash-out refi and you are a small-business owner, the next step is forbearance, where you are not going to pay your mortgage,” said Dave Stevens, CEO at Mountain Lake Consulting and a former head of the Federal Housing Administration.
Cash-out refinancing rose dramatically from 2002 to 2007 and was a contributing factor to the 2008 mortgage crisis when borrowers tapped so much equity in their homes that many simply stopped paying their mortgage.
Last year, roughly 13% of homeowners with loans owned by Freddie Mac took out roughly $91 billion through cash-out refis, according to Freddie
Kevin Peranio, chief lending officer at Paramount Residential Mortgage Group in Corona, Calif., said the change in the FHFA’s policy will affect homeowners with the lowest home values.
“Tapping into equity just got more expensive for consumers and it really has an impact on the lower end,” Peranio said. “What all these lenders are doing is modeling in risk and adding a hit for every cash-out refinance that they do so they can absorb those losses and offset the risk for borrowers who do ask for forbearance.
The cost of refinancing a loan also has become less profitable for lenders because of early payoff risk.
Mortgage lenders typically charge roughly $10,000 to refinance a loan, but it takes roughly 18 months to break even. With already-low rates potentially dropping further in the months ahead, lenders also have to price in the cost of early payoffs by borrowers who may refinance again in the year ahead.
More than 30 million people who have filed for unemployment in the six weeks since the coronavirus outbreak forced employers to shut down and lay off workers. Few in the mortgage industry think the reopening of businesses will reverse the higher standards for cash-out refis.
“When jobless claims comes down, cash-out refis will be back,” Mohtashami said.
