The Trump administration is reducing how much home equity mortgage borrowers can withdraw through cash-out refinances.
Starting Sept. 1, the Federal Housing Administration will limit the loan amountsfor cash-out refinancings to 80% of the home’s value or less. Previously, borrowers could take out up to 85% of the property’s equity.
The new loan amount limit is in line with the limits already in place at Fannie Mae and Freddie Mac.
Cash-out refinances have grown in popularity in recent years in tandem with ballooning home values across much of the country. Many people have turned to these loans to pay for home improvements, including renovations intended to aid older homeowners as they age in place rather than downsize to a smaller home or move to a retirement community.
In 2018, the volume of cash-out refinances grew as mortgage rates rose, making up 63% of all FHA refinance activity through September, up from 39% the previous year, the Wall Street Journal reported.
But that uptick in cash-out loans came with a drawback: Added risk. FHA officials said that the growth in cash-out refi activity in recent years has added risk to the government mortgage program. Back in January, foreclosure starts on FHA-backed loans hit a two-year high. Scheduled foreclosure auctions on FHA loans increased 3% through the first half of the year compared to the first half of 2018, according to data from Auction.com, even as overall scheduled foreclosure auctions are down 14%.
Ultimately, the FHA, which is a division of the Department of Housing and Urban Development, may be seeking to avoid a repeat of the chain of events that led to the last recession.
“People really started using their homes as ATMs, and when the market plummeted they ended up upside-down,” said Rick Sharga, a mortgage industry veteran. “A lot of the foreclosure activity in the last cycle was caused by people doing cash-out refis.”
Sharga said the net result of the FHA’s policy change should be positive for borrowers, because it will prevent them from overextending themselves. Most housing experts added that the new loan amount limits should only marginally cut into refinancing activity, because they don’t change the amount someone could borrow in a significant way.
However, some argued that the new limits could serve as a precursor to other changes in FHA policy as the government agency looks to reduce its risk. “I wouldn’t be surprised to see additional adjustments to FHA underwriting on purchase originations as well given that its delinquency rates on purchase loans are higher than refinance,” said Daren Blomquist, vice president of market economics at Auction.com.
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