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What’s Driving Cash-Out Volumes?

An analysis of the latest data on FHA-insured loans and their refinance activity by the Urban Institute revealed that cash-out refinances for FHA-insured loans are on the rise. The FHA's recently released Mutual Mortgage Insurance Fund (MMI Fund) report indicated a rise in cash-out refinance activity in 2018. According to the report, the number of cash-out refinance mortgages endorsed by the FHA increased from 141,885 in FY 2017 to in 150,883 in FY 2018, a 6.3 percent rise. As a share of total endorsement count, cash-out was nearly 15 percent, compared to 11.4 percent last year.

The analysis pointed out a couple of reasons for the rise in this activity. First was the rising mortgage rates that have significantly curtailed rate refinances loans, which in turn were boosting the share of cash-outs.

Second, according to the analysis was the 85 percent maximum loan-to-value (LTV) ratio for FHA cash-out refinances vs. 80 percent for conventional cash-outs. "In other words, borrowers can extract more equity through an FHA cash-out than a conventional one. Also, FHA cash-out refinances can be more cost-effective than conventional cash-outs for some borrowers because of a lower base FHA mortgage rate and FHA’s non-risk-based pricing," the analysis said.

The Monthly Chartbook also looked at default rates for the government-sponsored enterprises (GSEs) are much lower than they were a few years ago, according to an analysis of vintage loan level GSE credit data by the Urban Institute.

The data was analyzed as part of the Institute's Monthly Chartbook for November. Looking at Fannie Mae and Freddie Mac's 1999-2003 vintages, the analysis revealed that cumulative defaults totaled around 2 percent while those for loans from 2007 were at around 13-14 percent. However, they began to fall starting with the post-2009 vintage of loans, which are on pace to fall below the pre-2003 levels.

The analysis revealed, for Fannie loans 88 months after origination, the cumulative default rate from 2009-10 and 2011-Q3 2017 were about 0.96 and 0.37 percent, respectively, compared to the cumulative default rate from 1999-2003 of 1.35 percent. For Freddie loans 85 months after origination, the cumulative default rates totaled 0.94 percent from 2009-10 and 0.22 percent from 2011-Q3 2017, compared to the rate from 1999-2003 of 1.24 percent.

The analysis also looked at the status of the loan after it had experienced a credit event (defined as a delinquency of 180 days or more, a deed-in-lieu, short sale, foreclosure sale, or REO sale) and found that for Fannie Mae loans 14.7 percent were current, 16.1 percent were prepaid, 10.2 percent were still in the pipeline, and57.8 percent were already liquidated. Freddie Mac loans also showed similar results.

To read the full report, click here.

About Author: Radhika Ojha

Radhika Ojha is an independent writer and editor. A former Online Editor and currently a reporter for MReport, she is a graduate of the University of Pune, India, where she received her B.A. in Commerce with a concentration in Accounting and Marketing and an M.A. in Mass Communication. Upon completion of her master’s degree, Ojha worked at a national English daily publication in India (The Indian Express) where she was a staff writer in the cultural and arts features section. Ojha also worked as Principal Correspondent at HT Media Ltd and at Honeywell as an executive in corporate communications. She and her husband currently reside in Houston, Texas.
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