The Trump administration is moving to restrict mortgage refinancings in which borrowers withdraw cash, the latest effort to curb the federal government’s exposure to potential defaults.
The Federal Housing Administration, an arm of the Department of Housing and Urban Development that insures loans for mostly first-time buyers, plans to announce Thursday it will limit cash-out refinancings in its program. Borrowers will be able to pull cash out only when the new loan amounts to 80% of the value of the home or less, down from 85%.
The policy change, expected to take effect in September, follows a sharp rise in the use of cash-out refinancings over the past several years. Officials believe this has added risk to the $1.3 trillion government mortgage program.
“The risk at 85% is more than what we think is appropriate to bear and more than what we think we should expose taxpayers to,” said Keith Becker, the FHA’s chief risk officer.
Unnecessary refinancings can be costly to borrowers and limit the appeal to investors in the loan securities. Ginnie Mae, another arm of HUD, is also changing its cash-out policy.
Borrowers aren’t tapping their homes for nearly as much cash as they did before the financial crisis. But rising home prices have rewarded owners with more equity in their homes, and many are turning it into cash to make home improvements or pay bills. In the FHA program, there were nearly 151,000 cash-out refinances in the 12 months that ended in September, versus roughly 43,000 during the same period five years earlier.
Many lenders pushed cash-out loans as rates rose last year. Cash-out refinancings made up 63% of all FHA refinancings in the 12 months through September, up from 39% the year before.
When homeowners pull cash out of their properties, they are more likely to find themselves underwater if home prices fall. Many buyers who tapped their homes for cash during the run-up to the financial crisis ended up owing more than their homes were worth when home prices fell. That made it hard for them to move or take out a new mortgage, and in many cases prompted them to walk away from their homes.
The FHA in 2009 adjusted its cash-out refi cap to 85% of the property value from 95%.
The newest FHA rule change will bring its cap into line with
which currently allow borrowers to do a cash-out refinancing for up to 80% of the value of a property. That may reduce a phenomenon the FHA has seen where homeowners trade in Fannie or Freddie loans for FHA ones to pull additional cash out of their homes.
Still, FHA mortgages tend to be riskier than Fannie and Freddie loans. Not only has the number of cash-outs in the FHA program been growing, but FHA borrower credit scores have been trending lower, and more buyers have been tapping assistance programs to cobble together down payments.
The FHA has taken steps to rein in risk in its mortgage portfolio this year, saying it intends to protect the program’s financial well-being. The FHA insures mortgages and covers losses using an insurance fund. If it runs out of cash, it can draw on money from the U.S. Treasury, as it did in 2013 to cover losses on crisis-era loans.
Ginnie Mae, which guarantees mortgage bonds made up of mostly FHA mortgages and loans issued through a Department of Veterans Affairs program, will separately move forward with plans to exclude loans from its flagship securities when cash-out refinancings exceed 90% of the value of the home.
Such loans are generally issued through the VA program, which is structured to allow veterans to pull more cash out of their homes. The over-90% loans will be segmented into their own securities because they have different characteristics that make them less attractive to investors. The government corporation requested comments on the proposed changes in May and will implement them in November.
By separating out these loans, Ginnie Mae hopes the flagship mortgage bonds will be more attractive to investors. It also hopes to reduce mortgage interest costs for borrowers.
“This is a small population of borrowers, but it’s creating outsized uncertainty in the security,” said Maren Kasper, the acting president of Ginnie Mae.
Write to Ben Eisen at email@example.com
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