According to Arthur Jobe, Senior Professional Product Management and Rental Property Solutions at CoreLogic, the resurgence in cash-out refinances is not a cause of concern. In his blog titled “A Bigger Slice of a Smaller Pie: Why We Shouldn’t Worry About the Rising Share of Cash-Out Refinance Loans,” Jobe points that while the spike in the share of cash-out refinances in 2017 and 2018 may be similar to what was observed just before the Great Recession, the credit quality, dollar volume and borrower characteristics of these loans could mean that there is less cause for concern in the current housing market.
According to CoreLogic research, over the past two years, the share of refinances jumped to 50 percent in 2017 and then again to 61 percent in 2018, the highest since 2006.
“While these numbers might appear alarming and similar to the trends prior to the financial crisis, there’s no need to worry, as the volume of cash-out refinance loans decreased in both years,” Jobe said.
Jobe also indicated that the recent increase in the share of cash-out refinance loans is not a byproduct of an increase in cash-out originations. This is the result of a decrease in interest rate or term reduction originations. In 2017, when interest rates increased, the number of borrowers successfully seeking an interest rate or term reduction loan recorded a drop by nearly 50 percent. On the other hand, the volume of cash-loans decreased by just over 8 percent, causing the share of cash-out loans to spike despite the decrease in volume—according to CoreLogic.
Addressing home price growth, Jobe indicated that the volume of cash-out refinance loans did not reflect a sharp decline on account of the home-equity wealth created by value appreciation. Year-over-year growth dropped from 33 percent in 2015 to 20 percent in 2016, even amidst further reduced interest rates. This suggests that the “pool of borrowers interested in refinancing was beginning to diminish. Rising interest rates in 2017 cooled the market further, and overall refinance volume dropped 35 percent that year.” Jobe stated that the decline in cash-out refinance loan volume at a limited 8 percent indicate that continued growth in home prices and relatively low interest rates provided a cushion for the cash-out refinance market by offering some continued opportunity and incentive.