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Robert Nusgart: Cash-out refinancing has all but vanished

In the last couple of years there has been a frenzy of home owners who have refinanced.

Not just once. Maybe twice. Even three times.

They’ve lowered their rates. They’ve lowered their monthly payments. They’ve lowered the number of years on the mortgage.

But one thing they haven’t been able to do as much is take cash out of their home.

In the crazy real estate boom, when values were zooming up like August temperatures, millions of homeowners treated their homes not so much as a place to live but more like a piggybank.

Ten years ago you could pick up a newspaper and find numerous ads from banks and savings and loans offering home equity lines that would allow you to leverage your home up to 100 percent — and in some cases even 125 percent — of its value. Or if you didn’t use a home equity line and still had significant equity the home, you could easily take as much cash out until you reached 80 percent of the value of the home because anything higher than 80 percent would trigger private mortgage insurance.

Times have changed. Did all of that excess equity lead to an economic boom in the early 2000s? Absolutely. People used the money to improve their homes, to purchase and upgrade appliances, to add decks and patios. They also used the equity to buy cars and finance college educations. The shopping list could go on and on.

Sobering results

But with the real estate crash and values sinking, the sobering result has been millions of homeowners left with mortgages that are higher than the value of the home or with home equity lines that are secured in reality by nothing.

When the mortgage market imploded almost five years ago, the first programs to vanish were reduced documentation programs — stated income, stated assets, no ratio and no documentation programs. Next came cash-out programs. They didn’t go away, but the loan-to-value guidelines changed drastically.

To that end, Fannie Mae and Freddie Mac, which account for most of the nation’s mortgage pool, put the brakes on those cash-out refinancers. And it shows.

Last week, Freddie Mac, as a part of its second-quarter 2012 data release, showed that less than one in five of its funded refinances were for a cash-out loan. In fact, 81 percent of those homeowners just lowered their rate and kept their balance steady or brought money to the table to lower their principal balance.

Of the 81 percent, 59 percent of the mortgages were approximately the same size and 22 percent reduced their principal balance, the highest percentage in that category in the 27 years Freddie Mac has kept track. In the first quarter of 2012, 79 percent of borrowers maintained or lowered their loan amounts. Freddie Mac reports this data from a sample of properties on which it has funded two successive conventional first-mortgage loans, the most recent for refinance rather than purchase.

According to Mortgage Daily News, an Internet service that tracks the industry, borrowers converted an estimated $5 billion in net home equity to cash through refinancing. Adjusted for consumer-price inflation, this is the lowest cash-out amount since the second quarter of 1995. By contrast, at the peak of cash-out refinancing in the second quarter of 2006, homeowners cashed out $84 billion.

According to Freddie Mac, the homes refinanced had a median depreciation of 16 percent since the purchase or most-recent refinance; therefore, many borrowers may have had no equity to withdraw. The median age of the loan that was refinanced was 5.1 years, the oldest median in 13 years.

Interestingly, Freddie Mac also released data on its Home Affordable Refinance Program, which is geared to help those homeowners who purchased and settled prior to June, 1, 2009.

Larger depreciation

Not surprisingly, homeowners who were able to refinance through HARP had suffered a much larger depreciation than others who refinanced during the quarter. The median depreciation for HARP loans was 34 percent. The median interest rate reduction for a 30-year fixed-rate mortgage was about 1.5 percentage points, or a savings of about 28 percent in the interest rate, the largest percent reduction recorded in the 27 years of analysis.

“The typical borrower who refinanced reduced their interest rate by about 1.5 percentage points,” according to Frank Nothaft, Freddie Mac vice president and chief economist “On a $200,000 loan, that translates into saving about $2,900 in interest during the next 12 months.”

Robert Nusgart is a loan officer with Mortgage Master Inc. in Baltimore. He can be reached at 443-632-0858 or by email at [email protected] Visit his website at www.RobertNusgart.com for the latest mortgage and financial news.