New HUD Cash-Out Refi Rules Aim to Reduce Borrower Risk

The Department of Housing and Urban Development (HUD) announced Thursday new policy action initiatives designed to reduce the risks associated with cash-out refinance lending. It aims to accomplish this by lowering its maximum loan-to-value (LTV) requirements for cash-out refinance transactions from 85 percent to 80 percent, which will be effective for loan case numbers assigned on or after September 1, 2019.

This move aligns with the maximum cash-out LTV allowed by the Government Sponsored Enterprises (GSEs), according to HUD. Additionally, the Government National Mortgage Association (GNMA, or “Ginnie Mae”) announced its own action to manage risks associated with “loan churning,” specifically as it relates to mortgages insured by the Department of Veterans Affairs (VA).

“Rapid, serial refinancing has proven to deplete home equity and wealth for veterans with VA-insured mortgages and harmed investor confidence in mortgage-backed securities (MBS) that Ginnie Mae guarantees,” HUD said in a release announcing these changes.

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The changes will preserve the ability of homeowners to convert home equity to cash through the use of a government-sponsored mortgage while also improving the risk profile of HUD’s housing finance programs, the agency said.

“We are taking another important step to support sustainable homeownership that builds wealth for families,” said Federal Housing Commissioner Brian Montgomery in a press release announcing the initiatives. “This is a prudent measure to make certain that we protect and preserve the home equity borrowers are building for their futures and guard against taxpayer losses from the FHA program.”

The announcement also reinforces the commitment of Ginnie Mae to ensure that its policies enable prudent borrowing on the part of homeowners, according to Ginnie Mae Acting President Maren Kasper.

“Additionally, this policy provides global investors with increased certainty in the performance of the Ginnie Mae security, which ultimately lowers mortgage rates for all borrowers served by our program,” Kasper said in the press release.

Cash-out refinances represent an increasingly larger portion of all FHA-insured refinance transactions, 64 percent, according to FHA’s latest annual report to the United States 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.

“This further adjustment to its maximum LTV requirements will permit FHA to mitigate this risk and, importantly, preserve FHA-insured borrowers’ wealth. Today’s announcement also aligns the FHA’s maximum LTV requirements with those of the GSEs, Fannie Mae and Freddie Mac,” said HUD in the press release.

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