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What’s with the New Lending Restrictions on Refinances?

First, Federal Housing Administration (FHA) capped cash out refinances at 80% down from 85% just announcing the changes going into effect September 1st , 2019.  Now Ginnie Mae is capping VA Cash Out Refinances and 90% Loan-to-Value loans are no longer in their wheelhouse, unless as inside a custom Ginnie Mae Pool. Some refinances will be grouped into that pool, but are going to be the exception and probably few and far between because they do not meet their regulatory standard guidelines. 

Refinancing a mortgage means paying off an existing loan and replacing it with a new one. There are many reasons why homeowners refinance: 

  • obtain a lower interest rate; 
  • to shorten the term of their mortgage; 
  • convert from an adjustable-rate mortgage (ARM) to a fixed-rate mortgage, or vice versa; 
  • tap into home equity to finance a large purchase, or;
  • consolidate debt.

So why take away high loan-to-value ratios? Especially when refinancing is a huge benefit to Homeowners?

Mortgage Refinances

VA refinances

Ginnie Mae states “Its proposal, released on Friday, is aimed at stopping so-called “churning,” a practice in which lenders push borrowers to refinance their home loans over and over in a bid to boost fees to the lenders. Ginnie Mae has made churning a priority in recent years. It started taking action against individual lenders last year when their activity suggested they were pushing refis on borrowers, even when the borrowers wouldn’t benefit from it.  Ginnie Mae’s backing of government mortgage bonds gives investors certainty they will be paid, which in turn allows lenders to make mortgages at lower rates, often to first-time home buyers and veterans.

Ginnie said the proposal is being driven by the concerns of investors. The investors buy the securities from Ginnie Mae. When mortgages are refinanced at a rapid pace, the mortgage securities are paid off more quickly than expected, which means investors don’t receive the yield expected. Even a little bit of churning can reduce the attractiveness of an entire pool of loans by shortening the life of the bonds. “It’s a small portion of the loans but it has an outsized impact,” said Maren Kasper, Ginnie Mae’s acting president. “Investors just don’t have the certainty they need to know they won’t get these loans in their pools.” 

Ginnie has found that despite past efforts to curb churning, it remains most pronounced among VA cash-out refis.  Especially where the loan to value is over 90%, according to the proposal. Some investors say the churning issue, and its impact on the bonds, has caused them to sour on Ginnie Mae debt. https://www.housingwire.com/articles/49758-ginnie-mae-takes-steps-to-squash-va-loan-churning

Mortgage Restrictions

The Mortgage Industry is highly regulated in fact,  the level of rules and regulations required to be observed by mortgage lenders is stunning. It may come as a surprise, but there’s no real limit as to how many times you can refinance. 

While that is true there’s nothing stopping you from doing this, the investors take a pretty unwelcoming view. Most lenders will expect the loan to be on their books for at least six months. When a loan is paid off very quickly, it is problematic for the lender. The costs for a Lender on a mortgage are front loaded. Meaning the Lender incurs these costs up front and only realizes profits later on down the line. A mortgage that doesn’t stay on the books for any length of time can impact and cost the lender considerably.  

What about FHA? 

FHA Loans Refinances

FHA Refinances

FHA has a different approach altogether. According to the Wall Street Journal 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. 

FHA says 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. Ultimately, FHA, may be seeking to avoid a repeat of the chain of events leading 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 good portion of the  foreclosure activity in the last cycle was caused by people doing cash-out refis.”https://www.wsj.com/articles/tapping-homes-for-cash-to-get-tougher-under-new-fha-limits-11564651803 

So overall, Ginnie is concerned about their bottom line, the risky investments. Investments that are not yielding the highest returns assumed; Homeowner’s churned by lenders and other potential illegal practices.  While FHA is trying to save people from our past mistakes. If a recession is on the horizon a repeat of the past won’t be in our future. In the past, people were using their home like an ATM and renovating homes and consolidating debt. When the market crashed they were extremely upside down.  Although this wasn’t the case for everyone, it was a contributing factor in the overall housing crisis. 

In summary, if you are looking to refinance at a high loan to value ratio, now is the time. As changes roll around and rates are low, check out your options. 

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