The U.S. Housing Department of Housing and Urban Development on Thursday announced it would restrict cash-out refinancings, in an apparent effort to curb exposure to risk.
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A cash-out refinance allows a borrower to draw on equity in their home – replacing an existing mortgage with a loan for more than what is owed on a property. The extra money is doled out to the individual in the form of cash, which can be spent on things like home improvements.
Cash-out refinancing compares with traditional refinancing, which replaces an existing mortgage with one for the same balance.
Under the new policy, the cash-out refinance cap would be lowered to 80 percent of a property's value, down from 85 percent.
“We are taking another important step to support sustainable homeownership that builds wealth for families,” Federal Housing Commissioner Brian Montgomery said in a statement. “This is a prudent measure to make certain that we protect and preserve the home equity borrowers are building for their futures and guard against taxpayer losses from the FHA program.”
The policy will be effective for loans with case numbers assigned on or after Sept. 1. It lines up with Fannie Mae and Freddie Mac’s policy.
The agency noted it last adjusted the amounts borrowers were able to take out in cash on the value of their home in 2009, to 85 percent from 95 percent.
During a time of home appreciation prior to the housing market collapse, many people turned to cash-out refinances. However, when home prices fell, they were left with negative equity – and some defaulted.
According to government data, cash-out refinances represent 64 percent of all FHA-insured refinance transactions – their numbers not only large, but growing. They increased to 150,883 in fiscal 2018, up from 43,052 in fiscal 2013.
Meanwhile, home prices have been on the rise. The median existing home price reached an all-time high of $285,700 in June – up 4.8 percent year over year.
As previously reported by FOX Business, homeowners had more than $5.8 trillion in equity – which is not only a record amount but also more than double levels seen in 2011 and 2012. "Tappable" equity grew 7 percent in the first quarter alone, driven in part by rising home prices.
This isn’t the first housing change the administration has announced throughout recent weeks. Last month the administration announced that it did not intend to renew a temporary provision whereby Fannie Mae and Freddie Mac were able to work with riskier borrowers.
The so-called “GSE Patch” was created in the wake of the financial crisis, as a temporary way to allow American borrowers with higher levels of debt to access credit.
The rule is scheduled to expire January 2021, or when Fannie and Freddie are no longer under conservatorship.