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Cash-out refinances, HELOCs boom with rising home values

With rising home prices, more Americans have been using their homes as piggy banks.

The volume of cash-out refinances and home equity lines of credit (HELOCs) has been climbing as interest rates have stayed down and homeowners continue to take advantage of the rising value of their houses. 

“Certainly the share is rising,” Fannie Mae’s Chief Economist Doug Duncan told Scotsman Guide News this week.  

Data from Fannie Mae and Freddie Mac both point to an uptick in cash-out refinances. Cash-out refinance volume accounted for 18.6 percent of the outstanding balance of all loans acquired by Fannie in 2015, compared to 16.1 percent and 14.5 percent in 2014 and 2013, respectively, Fannie data shows.    

Meanwhile, Freddie Mac tracks the percentage of its refinance loan counts where the borrower has refinanced at 105 percent of the prior loan balance, an indicator that the homeowner is tapping equity.

Loans at 105 percent or more loan to value accounted for 43 percent of the refinances in the fourth quarter of 2015, up from 28 percent for the same quarter in 2014, and just 12 percent in 2012, Freddie reported.

The percentage is still far below the peak period of cash-outs during the housing bubble years between 2005 and 2007, when more than 80 percent of all Freddie Mac’s refinances exceeded 105 percent of the prior balance of the loan.

The cash-outs have been spurred on by rising home prices, which have grown by more than 5 percent nationally over the past three years, Duncan said. Some areas of the country have seen double-digit increases in prices, such as California and Colorado. 

HELOC originations also jump

Data suggests that an uptick in cash-out refinances has been mirrored by increases in home equity line accounts. The cash-outs have been helped because interest rates have stayed down. Once mortgage rates move up, cash-out refinances will probably lose favor to increasing numbers of HELOCs, which are a more flexible way to tap equity and typically cheaper and easier to obtain than a refinancing a first mortgage, the analysts say.

“If you think about the interest rate a half a point or a point above today, unless a person is moving, you think they would go for a home equity line,” Duncan said. “It depends on the relative cost of that home equity loan.”

New HELOC accounts totaled 1.29 million through November 2015, which exceeded the total for each of the years 2014 and 2013, according to Equifax. HELOC originations have risen from 847,000 in 2011 and are at the highest point since 2008, when 1.8 million accounts were originated.

“We are definitely seeing a rise in home equity lending,” said Amy Crews Cutts, the chief economist for Equifax. Cutts said the numbers are still well below the levels of the bubble era. Only an estimated 1.4 percent of the recent HELOCs were issued to subprime borrowers with credit scores below 620. 

Crews also said HELOCs should continue to rise even after interest rates move up, but lenders are still applying tough criteria. Delinquency rates have been low, she said. 

“They are very hard to get,” Cutts said during a telephone interview. “Only the best credit risks are getting them.”  

Ohio-based originator Deborah Foley, who is licensed in several states with high-cost markets, including California,  says roughly 50 percent of her refinance volume last year were cash-outs. She noted that the market has been slowing down in some markets, but the rising home values have been pushing interest in both cash outs and HELOCs. 

“I had a refinance client in California in the L.A. area that appraised at [$750,000] in February ([and] refinanced again in November at $850,000,” she said. “He had a $100,000 increase in his home [value] in nine months.”


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