A Bigger Slice of a Smaller Pie: Why We Shouldn’t Worry About the Rising Share of Cash-Out Refinance Loans

By Arthur Jobe Housing Affordability, Mortgage Finance

Over the past two years, the residential mortgage market has witnessed a spike in the cash-out share of refinances. The share jumped to 50 percent in 2017 and then again to 61 percent in 2018, the highest since 2006[1] (Figure 1). While these numbers might appear alarming and similar to the trends prior to the financial crisis, there’s no need to worry, as the volume of cash-out refinance loans decreased in both years.

Cash Out Shares

CoreLogic TrueStandings data shows that the total volume of cash-out finance loans between 2015 and 2018 is roughly one-quarter of the volume originated between 2003 and 2006. The initial rebound of the share of cash-out loans prior to the spike began in 2014, when the volume of cash-out refinance loans had fallen to a 17-year low. In other words, cash-out refinance loans aren’t much of a concern to the mortgage industry right now because they’re making up a bigger slice of a much smaller pie.  

Drop in Rate or Term Reduction Loan Originations Boosts Recent Cash-Out Share

The volume of both cash-out and non cash-out loans increased in 2015 and 2016 as borrowers enjoyed a two-year window when decreasing interest rates and continued home-price growth offered ideal conditions for refinancing.  When interest rates increased in 2017, overall refinance volume declined, but more so for rate or term reduction loans than for cash-outs[2].  The number of borrowers successfully seeking a rate or term reduction loan dropped by nearly 50 percent while the volume of cash-out refinance loans decreased by a just a little over 8 percent, causing the share of cash-out refinance loans to spike despite the decrease in volume (Figure 2).

Year Over Year

Home-Price Growth Softens The Blow of Rising Interest Rates

The volume of cash-out refinance loans might have fallen more sharply last year if it wasn’t for the home-equity wealth created by value appreciation. Some decline in the growth of overall refinance volume could have been expected for 2017 after slowing growth during the previous year. Year-over-year growth dropped from 33 percent in 2015 to 20 percent in 2016, even amidst further reduced interest rates, suggesting that the pool of borrowers interested in refinancing was beginning to diminish. Rising interest rates in 2017 cooled the market further, and overall refinance volume dropped 35 percent that year. The limited 8 percent decline in cash-out refinance loan volume suggests that continued home-price growth and relatively-low interest rates provided a cushion for the cash-out refinance market by offering some continued opportunity and incentive.

[1] Origination volume is based on CoreLogic TrueStandings Servicing data

[2] Changes in interest rate are based on weighted average interest rates for refinance mortgages as seen in CoreLogic TrueStandings Servicing data

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