Borrowers Are Tapping Their Homes For Cash, As Rates Rise And Fall (#GotBitcoin?)
Rising mortgage rates are crushing much of the refinancing market. But Americans are still using refis to pull cash out of their homes.
More than 80% of borrowers who refinanced in the third quarter chose the “cash out” option, withdrawing $14.6 billion in equity out of their homes, according to government-sponsored mortgage corporation Freddie Mac . That is the highest share of cash-out refis since 2007.
The trend attests to the current state of the U.S. economy, which is more than nine years into an expansion that has lifted home values sharply but raised worker pay at a much slower pace. Now, many are finding their homes to be a tappable source of wealth.
“Home equity is the big pot of gold,” said Sam Khater, the chief economist at Freddie Mac.
The increase is also a reminder of how rising mortgage rates are roiling the market. Higher rates, which make buying a home more expensive, are slowing down home sales. Rate-based refinancings, where a homeowner gets a lower rate on their mortgage, are also drying up, which has caused the higher proportion of cash-out refis. The average rate on a 30-year fixed-rate mortgage is 4.81%, according to data released Wednesday by Freddie Mac, up from 3.99% at the end of last year.
In a cash-out refi, a homeowner essentially trades in a mortgage for a new one with a larger principal balance. The borrower can then pay off the old mortgage and still pocket a chunk of cash. Lenders say that homeowners often use the cash for home renovations or to pay down other debt.
Mandy Whitworth of Dallas completed a cash-out refi a few months ago. She said she is happy that the roughly $75,000 in cash will let her pay for a home addition and pay off a credit card, even though she had to trade in a mortgage with a 3.625% interest rate for one with a 5.75% rate.
“For me, I don’t have that much cash on hand,” she said. “It allowed me to pull out equity from the home to reinvest in the repairs and addition.”
Cash-out refis played a big role in the decade-ago housing crisis, when many homeowners used their properties as ATMs just before home prices plunged. But the amount of cash homeowners are extracting now is far below precrisis levels, a sign that borrowers and lenders are more cautious this time around. In 2006, there were three straight quarters during which borrowers withdrew more than $80 billion.
Summer Garrett, a mortgage loan originator at Homebridge Financial Services Inc. in Dallas, said borrowers are showing more interest in cash-out refis as home prices continue to rise in the area, even though interest rates also are rising.
“Even with that higher interest rate, it is still less expensive than other avenues,” she said. The average rate on a credit card is nearly 18%, according to Bankrate.com, a personal finance website.
Still, some industry watchers worry the products could be marketed to homeowners who don’t understand them by lenders anxious to keep up loan volume in a cooling housing market.
“There are issuers that really want to make their profitability targets,” said Michael Bright, chief operating officer of government-owned mortgage corporation Ginnie Mae. “The only way to do it is to convince borrowers to take cash out of their house.”
A homeowner who uses money from a cash-out refi to pay down other, higher-rate debt could still end up paying more in the long run. A borrower who trades in a 4% mortgage for a 5% mortgage might be able to pay off credit-card debt but could end up paying thousands of dollars more in interest over the life of the mortgage.
Borrowers who swap credit-card debt for mortgage debt are essentially trading unsecured debt for secured debt, where the repercussions for missing payments are much steeper. Borrowers who miss mortgage payments can end up in foreclosure. Also, if home prices fall, homeowners can end up owing more than their homes are worth, which happened to many borrowers in the financial crisis.
Mr. Bright said Ginnie Mae is “preparing to take additional steps” to ensure “that borrowers aren’t being solicited for refinancings that don’t make sense.”
Ian Young, a cybersecurity architect who lives in Huntsville, Ala., did a cash-out refi in 2016, pulling $50,000 out of his home to cover the cost of renovations and pay down student loans. Since then, he has incurred more debt from pursuing another degree. But even though the value of his house has increased, he decided against another cash-out refi.
“I would rather keep the mortgage low enough that I could still sell the house and move,” he said.
Nonetheless, some borrowers find cash-out refis attractive. Jameson Wildwood, a software engineer in North Carolina, did a cash-out refi over the summer on an investment property he owns in Sacramento, Calif. He used the approximately $31,000 he pocketed to make another real-estate investment.
“I think the market, especially in California and other areas, has increased a lot, so there’s a lot of equity that active investors can use to make more investments,” he said. “For me, it was a great way of putting those funds to work.”
Americans Are Taking Cash Out of Their Homes—And It Is Costing Them
Many homeowners pay higher rates after refinancing their homes to tap home equity, but the trade-off often makes sense.
Many Americans who need cash are taking it out of their homes. The trade-off: higher interest rates.
Over the past two years, a big chunk of homeowners took on higher interest rates when they refinanced to tap their home equity. These cash-out refinancings, as they are known, free up money homeowners can use to pay down credit-card debt, renovate or invest in a new property.
Nearly 60% of cash-out refinancings in 2018 came with higher interest rates, the biggest share since before the financial crisis, according to Black Knight Inc., a mortgage-data and technology firm. This year, that number fell to around 44% of cash-out deals, but it remains at more than three times its average between 2009 and 2017.
This corner of the mortgage market illuminates the crosscurrents in the U.S. economy: After roughly a decade of rising home prices, homeowners are flush with record amounts of home equity they can tap. But many Americans remain short on cash and are increasingly relying on debt to fund their lives.
“There’s something in their life that is causing them to need money,” said Sam Polland, a mortgage-loan officer at Sandy Spring Bank in Rockville, Md. “They are willing to go up in rate to get the equity out of their house.”
For some homeowners, the trade-off is worth it. While mortgage rates have crept up, they are still lower than what borrowers would pay if they tapped a credit-card or home-equity line of credit.
Cash-out refis made up a significant share of refinancings in the third quarter, helping fuel a rebound in the mortgage market after a dismal 2018. Led by refis, lenders originated $700 billion in mortgages in the third quarter, the most since before the financial crisis, according to industry research group Inside Mortgage Finance.
The average 30-year fixed mortgage rate has been under 4% for much of the year. That is low by historical standards, but higher than periods in 2012, 2013, 2015 and 2016 when borrowers last flooded the market. Black Knight found that 39% of the people who did cash-out refis in the third quarter had obtained their mortgages during those four low-rate years.
Paul Thompson, who works in product development, got a mortgage at 4% when he bought his Dallas house in 2015. This month, he refinanced at 4.625% and took out about $30,000.
The higher rate was worth it, he said, because it gave him the cash to renovate an investment property next door that he bought this fall. His parents are planning to move in once it is finished.
“It just gives me some cushion should I have to go back to being self-employed,” said Mr. Thompson.
Summer Garrett, Mr. Thompson’s loan officer at Caliber Home Loans Inc., said cash-out deals made up about 30% of her business over the past few months. Many clients use them to pay off credit-card debt, she said.
The use of cash-out refinancings worries some economists because it echoes the precrisis era, when homeowners used their homes like ATMs. Consumers who struggle to pay mortgages that have swelled due to a cash-out refinancing risk losing their homes. Credit-card debt, by contrast, is unsecured.
But the volume of cash-out refinancings remains well below precrisis levels. And many lenders say this type of activity isn’t uncommon deep in an economic expansion marked by rapid home-price growth in much of the country.
Cash-out refinancings also look increasingly attractive next to home-equity lines of credit. The 30-year fixed mortgage rate has fallen at a much faster pace than Heloc rates this year because they are based on different benchmark rates that haven’t moved in tandem.
In September, the average 30-year mortgage rate was almost 3 percentage points lower than the average Heloc rate, the biggest gap on records going back to 1992, according to personal-finance website Bankrate.com.
Homeowners sometimes lower their rates through cash-out deals.
Matthew Miller traded in an adjustable-rate mortgage at 4.75% for a 30-year fixed-rate loan at 3.5% this fall.
The New York-based architect took out the ARM last year to finance the purchase of a home in Sagaponack, N.Y. Because the house wasn’t up to code, he had trouble finding a lender and accepted a rate higher than the market rate as a result.
He renovated the property to bring it up to code, allowing him to refinance into a fixed-rate mortgage. The renovation also increased his equity; he pulled out $350,000 through a cash-out refinancing to cover the construction costs.
Millions Are House-Rich but Cash-Poor. Wall Street Landlords Are Ready.
Hardships caused by the coronavirus pandemic are likely to force a lot of sales and create new renters.
Americans with mortgages have accumulated nearly $10 trillion in home equity thanks to a decade of rising home prices. Yet millions of them have fallen behind on mortgage payments and risk losing their houses.
It is a potential bonanza for rental-home investors. Since the coronavirus pandemic began, big single-family landlords have raised billions of dollars for homebuying sprees.
Even if there isn’t a surge in repossessed homes to buy cheaply off the courthouse steps—which led to the emergence of Wall Street’s landlords during the foreclosure crisis a decade ago—there is likely to be a lot of forced sales and new renters.
“A lot of people are house-rich but cash-poor,” said Ivy Zelman, chief executive of real-estate consultant Zelman & Associates. “If they bought in the last two or three years, even if they bought five months ago, they have equity.”
Having plenty of home equity but reduced means to keep making payments could prompt many to sell while prices are high and exit homeownership with a cash cushion, Ms. Zelman said.
People behind on their payments aren’t being kicked out of their houses yet because of federal and local restrictions on foreclosure enacted during the pandemic. Many with federally guaranteed mortgages have entered forbearance, which allows them to skip payments for up to a year without penalty and make them up later.
Some 3.5 million home loans—a 7.01% share—were in forbearance as of Sept. 6, according to the Mortgage Bankers Association. Many more borrowers are behind on their payments but not in forbearance programs with their lenders.
Meanwhile, bidding wars are breaking out for suburban homes hitting the market.
Millennials coming of age have been enticed by historically low mortgage rates. Other house hunters are leaving city centers and apartments, seeking room for home offices and space between them and their neighbors. And then there are investors, a mix of individuals and investment firms that have been buying more than one in every 10 homes sold in the U.S. over the past decade.
The most house-hungry of these investors are the rental companies formed a decade ago to gobble up foreclosed homes by the thousands. They were expanding before the pandemic, wagering on a permanent suburban rental class. The economic distress brought by the lockdown has only made investors more excited about such companies’ prospects.
So far these companies have reported record occupancy, on-time rent collection on par with historical averages and rising rents. Shares of the two largest landlords, Invitation Homes Inc. and American Homes 4 Rent, are up 79% and 59%, respectively, since stocks bottomed on March 23. The S&P 500 is up about 50% during that time.
Investors have bought nearly $900 million of new shares sold by the two largest rental companies since the pandemic began. Other home-rental operations have also sold nearly $6 billion of rent-backed bonds, including three deals presently in the market, according to Akshay Maheshwari of Kroll Bond Rating Agency.
Beyond that, investment firms Blackstone Group Inc., Koch Industries Inc., J.P. Morgan Asset Management and Brookfield Asset Management Inc. have each made nine-figure investments in single-family rental companies eyeing expansion.
American Homes 4 Rent, which owns about 53,000 houses, in May more than doubled the size of a home-building pact with J.P. Morgan Asset Management to $625 million and last month raised more than $400 million in a stock offering.
“We’re endeavoring to deploy that capital as quickly as possible,” Christopher Lau, American Homes 4 Rent’s finance chief, told investors at a virtual conference this week.
American Homes 4 Rent is still buying properties off the open market. But the company has focused lately on building homes expressly to rent and this summer has been one of the country’s most-active builders.
Its largest rival, Invitation Homes, hasn’t been building but it has resumed its prepandemic pace of buying about $200 million worth of homes every three months. To fund its expansion, Invitation sold about $500 million worth of new shares in June.
“We could have, quite frankly, raised a whole lot more,” Chief Executive Dallas Tanner said last week at an industry conference.
Invitation Homes said in a presentation to investors this month that it is planning a sale-leaseback program as another channel to add to its 80,000 homes. Invitation Homes executives said the plans are nascent and declined to discuss them in more detail.
Sale-leaseback transactions are common in commercial real estate and involve the owner of a property selling to investors and then renting it from the buyer.
Such arrangements would allow those who face the prospect of losing their homes to cash in on high house prices without having to move, said Jarred Kessler, chief executive of EasyKnock Inc., a startup that he said raised $25 million from venture investors in June and hundreds of millions of debt to launch a sale-leaseback program this month called ReLEASE.
The business line was originally conceived to allow homeowners to start cashing out of their homes when the market was hot or when an expense arose, but not necessarily when they wanted to move. Since starting out in 2016 the New York firm has bought $187 million worth of houses, all of which remain occupied by the sellers. Now EasyKnock has distressed borrowers in mind and is looking toward early next year, when prohibitions on foreclosure are set to expire.
“Once January comes that’s when the carnage will come,” Mr. Kessler said. “We’re just giving people choices that they never had before.”
“It was a stressful process, definitely,” he said. “But now that it’s done it feels really good.”
Financial Crisis Scars Tie Up $8.1 Trillion In U.S. Home Equity
U.S. homeowners spooked by the burgeoning pandemic last spring rushed to tap equity in their properties for a hit of ready cash — and equally wary banks tightened credit or halted lending in response.
In the past year, monstrous demand for homes amid a scarcity of listings pushed up prices to the point of giving owners more collective equity than they’ve ever had before: $8.1 trillion, according to data provider Black Knight Inc.
But despite the roaring housing market and economic recovery, lenders are still keeping a tight grip on home equity lines of credit, or Helocs, a primary way borrowers can turn value stored in a home into cash. Chalk it up to lessons learned from the last real estate crash, and other options for homeowners that may be less costly given today’s historically low mortgage rates.
“Many banks are still wary of the risks of making home-equity lines of credit,” said Keith Gumbinger, vice president at mortgage-information company HSH.com. “For both banks and borrowers, cash-out refinancing can offer a very viable alternative for accessing the growing equity in their homes.”
Demand for Helocs has tumbled since the beginning of the pandemic, with application volumes last month totaling about half that of March 2020, when homeowners raced to obtain credit lines, according to data from Informa Financial Intelligence.
A Heloc functions like a credit card, with a consumer’s home equity serving as collateral. It makes sense for people who want to be able to tap into a reserve of credit as they need it instead of receiving a lump sum, as with a cash-out refi or other types of loans. That made it logical for homeowners to reach for Helocs as a security blanket while the coronavirus swept across the U.S.
The catch is that for banks, a Heloc is riskier than some other forms of lending because it’s a second lien — meaning it would be paid off after primary-mortgage obligations, creating the potential for losses if something goes wrong.
“A lot of lenders even before the pandemic hit were kind of reluctant to be in that second-lien position,” said Tendayi Kapfidze, chief economist at online loan marketplace LendingTree. “And then certainly when the pandemic hit, that became a very significant risk factor that many lenders didn’t want to be exposed to.”
That skittishness dates back to the financial crisis, when plummeting home values lashed banks with billions in second-lien losses. Reforms introduced after the crash ensure underwriting is sturdier than it was back then, with homeowners facing stricter limits on the amount of equity they can borrow against, as one example.
Even so, some of the largest lenders opted to pull away from the Heloc market last spring rather than stick around and learn whether the potential economic fallout of the pandemic could lead to similar losses.
For the most part, that retreat has yet to reverse. JPMorgan Chase & Co. isn’t accepting applications for Helocs, according to its website. Wells Fargo & Co. stopped taking them after April 2020 and hasn’t changed course since, the company said in an emailed statement, without specifying why its suspension remains in place.
An exception is Bank of America Corp., which tightened standards for Helocs last year and has since returned to pre-pandemic guidelines. Client interest in the credit lines has picked up as the country reopens and consumer confidence improves, a bank spokesperson said.
Homeowners aren’t exactly desperate for access to Helocs. They’ve been favoring cash-out refinancing, in which they get an infusion of funds — to pay bills or finance remodeling projects, and the like — while replacing an old mortgage with a new one with a larger balance.
Because of the additional risk, lenders tend to charge more in interest for Helocs. The average Heloc rate is 4.11%, compared with 3.18% for 30-year fixed-rate mortgages, Bankrate.com data show. Even if a lender tacks on a quarter of a percentage point for a cash-out refi, the rate is still significantly lower, making it a more-appealing option for many borrowers, according to Greg McBride, chief financial analyst at the firm.
While many of the largest banks keep Helocs at arm’s length, smaller lenders are still active in the market. M&T Bank tightened its standards for the credit lines but continues to issue them, said Joe Lombardo, head of consumer products at M&T.
With mortgage rates near record lows, cash-out refis are “taking up a lot of the demand for debt consolidation and home improvements that we would traditionally see home equity being a fit for,” said Lombardo, whose company was the 13th-largest Heloc lender in the U.S. last year.
“The larger lenders are sitting on the sidelines still,” he said, “because there isn’t a huge need from a consumer standpoint to get back in.”
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