Uncertainty spurs more homeowners to cash out equity
As stock markets plunged and businesses shut their doors in March, Sarah Pierce, head of sales at mortgage company Better.com, noticed something on the rise: the number of people applying for home loans larger than the ones they already owed.
The practice, known as a cash-out refinance, allows owners to take advantage of their home’s appreciation and borrow against the greater value, pocketing the additional cash. Within a month, applications for such loans had more than doubled.
“It’s been pretty crazy,” Pierce said of the sudden increase in volume.
Cash-out refinances were making a comeback before the coronavirus, and by the end of last year had reached the highest levels since the mortgage crisis, according to the government-sponsored mortgage-finance company Freddie Mac. Forty percent of those cashing out the equity of their homes were using the money to pay off bills and other debts — payments that will become even harder to make as many lose their jobs.
In 2006, 85 percent of refinances increased borrowers’ loan balances by at least 5 percent; the subsequent housing market crash left many owing more than their homes were worth.
Whether or not a recession hits this year and causes
home values to fall, leaving homeowners owing more than their homes are worth, depends on the severity of job losses and how long it takes to recover, explained Jim Gaines, chief economist at the Real Estate Center at Texas A&M University.
On stronger footing
The housing market entered this economic crisis on much stronger footing than it entered the Great Recession — home prices have been driven up by strong job growth and a shortage of new home construction, not by overinflated mortgage debt. Homeowners have much less risky loans.
While demand for homes has slipped recently, supply has also declined as homeowners have pulled listings from the market until the crisis passes. March data from the Houston Association of Realtors showed that while the number of new listings fell 5 percent from the year before, the average listing price was still up year-over-year by 4 percent.
That could change if more houses come on th market as homeowners are forced to sell their houses because of job losses. While the government-sponsored mortgage companies Freddie Mac and Fannie Mae have suspended foreclosures on their loans for a year, many homeowner loans are not backed by the federal government.
“The timing is going to be the critical variable in all of this, and nobody knows how long it will last,” Gaines said.
Unemployment figures are staggeringly high. On April 2, the Department of Labor announced that 10 million people had filed for unemployment benefits within two weeks. Nearly half a million Texans filed for first-time unemployment benefits during that time.
“We always see an influx when those announcements are made,” Pierce said. “They want cash on hand going into this uncertain time.”
Frank Nothaft, chief economist of the real estate data company CoreLogic, agreed that a surge in cashout refinance applications could reflect worries of a recession. “People could be worried about how the recession will unfold, so they want more liquidity.”
Consolidating debt
Paul Mandell recently closed on a refinance that allowed him to take out $60,000 against his equity in his home. He began looking into the refinance because of the low interest rates available — the average interest rates for a mortgage fell to historic lows in March as the economy began to wobble.
On the advice of his financial adviser, he refinanced his home with enough cash out to pay off a home equity note with nearly 7 percent interest he had taken out for roof repairs and credit card debt. The rate on his new loan is 3.75 percent.
Mandell plans to use the rest of the cash out to renovate his kitchen and guest bath — plans made before local governments began shutting down businesses to prevent the spread of the coronavirus in the United States.
“Fortuitously, I’m sitting here with money I’m planning to use for these renovations,” he said. “It’s nice to have that cushion sitting there.”
Heath Barnes, the loan officer at Cardinal Financial who refinanced Mandell’s mortgage, said his uptick in cash-out refinances have been driven by a combination of low interest rates and fears about the economy.
But Chad Helmcamp, owner of BWC Lending, said the investors who buy those mortgages are showing signs of wariness.
“They’re not really excited about cash-outs in this environment,” he said. “What if they take out a cash-out and don’t pay their mortgage?” Such investors are pricing cash-out refinances at an eighth to a quarter percentage point higher, according to Helmcamp; some are refusing to allow cash-out refinances on investment properties.
That hasn’t stopped homeowners. Helmcamp, too, has seen applications for cash-out refinances surge.
“People are nervous,” he said. “Oil and gas people — they want cash. Because they have no idea of what their future income is going to be.”