In a recent press release, the U.S. Department of Housing and Urban Development (HUD) announced new agency efforts designed to reduce the risks associated with cash-out refinance lending.
The Federal Housing Administration (FHA) is lowering the maximum loan-to-value ratio and combined maximum loan-to-value ratio on cash-out refinance mortgages from 85% to 80%. The policy change, detailed in Mortgagee Letter 2019-11, will be effective for loans with case numbers assigned on or after September 1, 2019 and applies to a property’s Adjusted Value as defined in HUD Handbook 4000.1. According to HUD, the policy change aligns with the maximum cash-out loan-to-value allowed by the Government Sponsored Enterprises (GSEs).
Federal Housing Commissioner Brian Montgomery said the change “is a prudent measure to make certain that we protect and preserve the home equity borrowers are building for their families and guard against taxpayer losses from the FHA program.”
FHA last adjusted the maximum loan-to-value on cash-out refinances from 95% to 85% in 2009 in response to the weakened housing market caused by the housing recession at that time. FHA has continued to monitor the risk associated with cash-out refinances, which represent an increasingly larger portion of all FHA-insured refinance transactions (64 percent) according to FHA’s latest annual report to Congress. The increasing share of cash-out refinances is attributed to the recent increases in home prices coupled with the decline of other refinancing activity.
The HUD press release also references steps taken by the Government National Mortgage Association (Ginnie Mae) to reduce risks associated with “loan churning” from mortgages insured by the Department of Veterans Affairs. Serial refinancing has led to a reduction in both investor confidence and home equity for veterans with VA-insured mortgages. Ginnie Mae announced that effective with mortgage-backed securities guaranteed on or after November 1, 2019, VA cash-out refinance loans with a loan-to-value ratio above 90% are ineligible for Ginnie Mae I Single Issuer Pools and Ginnie Mae II Multiple Issuer Pools. According to Ginnie Mae Acting President Maren Kasper, the policy change “underscores Ginnie Mae’s commitment to ensuring the agency’s policies enable homeowners to borrow prudently, utilizing the government-guaranteed mortgage market.”
