While it would appear that borrowers are using their homes as ATMs again, it’s a bit misleading.
Yes, the share of home mortgage refinances that resulted in cash out rose above 80% in the third quarter, per Freddie Mac data, but one must also consider overall loan volume.
Let’s start with the basics here. Of the refinances recorded in the third quarter, an overwhelming 81% resulted in a loan amount 5%+ higher.
That means the homeowner took on a larger loan amount in exchange for some sweet, sweet equity.
These were very common during the lead-up to the housing bubble, and partially why it bubbled to begin with, but became very rare post-crisis.
This is kind of a big deal because the cash out share was in the ~40% range as recently as 2017.
The Cash Out Share Bottomed in 2012
- The cash out share hit 12% in the second quarter of 2012
- The lowest since Freddie Mac began compiling records in 1994
- This was the result of restrictive underwriting guidelines
- Combined with sinking house values
However, the cash out share was a paltry 12% in the second quarter of 2012, and hovered below 20% for much of the time between 2010 and 2014.
Part of that had to do with the fact that homeowners didn’t have any equity to tap, what with home prices in the gutter and large outstanding mortgage balances ensuring there was nothing left to access.
Further exacerbating the issue was tight underwriting restrictions that limited cash out to very low loan-to-value ratios.
In other words, you basically needed to own your home free and clear or very close to it in order to get some cash out of the property.
Fast forward to 2018 and cash outs are king again, well, at least on paper. That 81% share is the highest since the third quarter of 2007, when the share was a staggering 87%.
It was actually slightly higher in the second and third quarter of 2006, at 89%. What made that even more remarkable was the volume seen at that time.
Not only were cash out refis all the rage, the loan amounts associated were massive thanks to questionable home appraisals and liberal underwriting standards, if you could even call them that.
Pretty much everyone and their mother was taking advantage of the 100% LTV cash out refinance, which when coupled with an option arm or other type of ARM, resulted in an unsustainable monthly payment once financing options dried up.
And as home prices tanked, so too did the incentive to keep the darn mortgage, which is why we experienced the worse housing downturn in decades.
But before we get too concerned about another home equity crisis, we need to consider the volume of these refis today.
Today’s Cash Out Volume Is a Drop in the Bucket
- If we look beyond refinance share and at volume instead
- It’s clear that cash out refis aren’t out of control again
- Less than $15 billion was cashed out in the third quarter
- It was as high as $84 billion in the second quarter of 2006
In the same report, Freddie lists the total home equity cashed out each quarter, in billions of dollars.
Sure, 81% is an overwhelming share, but it really only speaks to the fact that rate and term refinancing is all but gone, thanks to the recent increase in mortgage rates this past year and change.
Back to that volume – during the third quarter, an estimated $14.6 billion was cashed out. Sounds like a lot, but it’s not, at least relative to what we saw a decade ago.
In the second quarter of 2006, some $84 billion was cashed out of some very artificially inflated homes. That’s nearly six times the volume and doesn’t even factor in inflation over the past decade.
Basically, today’s cash out volume is a drop in the bucket compared to what we saw in the early 2000s.
In a three-year span between 2005 and 2007, more than $800 billion dollars was cashed out of U.S. properties nationwide. Where’d it all go? How much of it was actually paid back?
In 2005, volume was $262.7 billion, followed by $320.5 billion in 2006 and $239.7 billion in 2007.
Throw in 2004 and 2008 and you’re over a trillion dollars. Wow.
For more perspective, annual cash out volume for 2018 will likely be less than $70 billion. And it was only $69.6 billion last year.
Of course, we should certainly keep an eye on volume going forward to see if there’s another home equity party materializing.
Sure, homeowners like their low fixed mortgage rates an awful lot, but there’s a good chance they like cash even more. If and when the cash out volumes get closer to what we saw a decade ago, you can start to worry.