The U.S. Department of Housing and Urban Development (HUD) announced joint policy actions to “reduce risk associated with cash-out refinance lending.”
The changes preserve homeowners’ ability to convert home equity to cash via a government-sponsored mortgage – but it should also improve the risk profile of HUD’s housing finance programs.
To do this, the Federal Housing Administration (FHA) will lower its maximum loan-to-value (LTV) requirements for cash-out refinance transactions from 85% to 80% for case numbers assigned on or after Sept. 1, 2019. The new LTV limitations will then align with the LTV allowed by the Government Sponsored Enterprises (GSEs) – primarily Fannie Mae and Freddie Mac.
Meanwhile, the Government National Mortgage Association (Ginnie Mae) is taking further action to manage risk associated with ‘loan churning’ among mortgages insured by the Department of Veterans Affairs (VA). HUD says that 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.
“We are taking another important step to support sustainable homeownership that builds wealth for families,” says Federal Housing Commissioner Brian Montgomery. “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.”
“Today’s announcement underscores Ginnie Mae’s commitment to ensuring the agency’s policies enable homeowners to borrow prudently, utilizing the government-guaranteed mortgage market,” said 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.”
FHA: Before the housing recession, borrowers increasingly turned to cash-out refinances when home values were rising quickly. When prices declined in the wake of the housing collapse, however, many homeowners found themselves with negative equity and some faced foreclosure. FHA last adjusted the maximum LTV on cash-out refinances from 95% to 85% in 2009 in response to the weakening housing market and has been monitoring the risk associated with cash-out refinances since.
According to FHA’s latest annual report to Congress, cash-out refinances continue to represent a large and growing segment (64%) of all FHA-insured refinance transactions and accounted for 15% of all forward mortgage endorsements. This increasing share of cash-out refinances is attributed to recent home price increases and the decline of other forms of refinance activity.
Ginnie Mae: The Ginnie Mae II Multi-Issuer Program (GII MIP) represents nearly 90% of the agency’s mortgage-backed security (MBS) issuance. Strong market acceptance of the GII MIP enables Ginnie Mae to fulfill its mission of facilitating low-cost financing for American homeowners and the federal housing finance programs it serves.
In the current policy announcement, Ginnie Mae outlines revisions to the pooling eligibility requirements applicable to all VA-guaranteed refinance loans and establishes new pooling criteria for certain cash-out refinances with LTV ratios exceeding 90%.
Effective with MBS guaranteed on or after Nov. 1, 2019, high LTV VA Cash-Out Refinance Loans (those with LTV ratios above 90%) are ineligible for Ginnie Mae I Single Issuer Pools and Ginnie Mae II Multiple Issuer Pools, except in cases when the loans are Permanent Financing Construction Loans (as defined in Chapter 24 of the MBS Guide).
High LTV VA Cash-Out Refinances may be pooled into Ginnie Mae II Custom Pools without restriction, provided they satisfy the seasoning and number of payment requirements detailed in Chapter 24, Part 2 § (A)(3)(d).
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