Black Knight, the data source and consultant to mortgage servicers, reported yesterday, “In Q3 2015, 42 percent of all first lien refinances involved a cash-out component, the highest share since 2008. Likewise, the average cash-out amount — over $60,000 — is the highest since 2007.”
Sounds reasonable. After all, the Fed reports that total home equity had crashed in 2011 to little more than half its 2006 peak, and now is higher than it started — $12.3 trillion in total equity. By the way, about $3 trillion more than total mortgages outstanding, very good news.
But little in mortgageland is reasonable. Black Knight has gotten caught in the infernal terminology of mortgage underwriting.
You’d think that if you got a new “cash-out” loan, you’d get cash, right?
1. Um … no. If you took out a 2nd mortgage after you bought, an ordinary Home Equity Line of Credit, and refinanced to include the balance in a new loan — no net cash to you at all — that’s a “cash-out.” Not just since the Bubble, but at least the last 25 years. If you bought with a 2nd and have not increased the purchase balance, and rolled that loan into a refi, that’s a rate-term refi, not a cash out.
2. What’s the fuss about? Cash-back loans have higher rates of default, hence tighter loan-to-value ratios and higher costs. Hence also very tight definitions.
3. What if I roll some other debt into a new refi, like the student loan I had when I bought the house? Uh-uh. Even if you pay off the student loan at closing, that’s cash-out.
4. What if you make me pay off my car to qualify to refinance, and add that balance to my new loan? Cash-out.
5. What if I refi to pull cash out to pay off my ex-spouse? That’s not cash out. Not even Fannie wants to fool with divorces. Again, do not look to mortgages for reasonableness.
Lou Barnes is a mortgage broker based in Boulder, Colorado. He can be reached at lbarnes@pmglending.com.
