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56 | TH E M R EP O RT O R I G I NAT I O N S E R V I C I N G DATA G O V E R N M E N T S E C O N DA R Y M A R K E T THE LATEST GOVERNMENT What's Driving Cash- Out Volumes? Cash-out refinances for FHA- insured loans are on the rise, but what factors are playing a role? A n analysis of the latest data on FHA-insured loans and their refi- nance activity by the Urban Institute revealed that cash-out refinances for FHA-in- sured loans are on the rise. The FHA's recently released Mutual Mortgage Insurance Fund (MMI Fund) report indicated a rise in cash-out refinance activ- ity in 2018. According to the report, the number of cash-out refinance mortgages endorsed by the FHA increased from 141,885 in FY 2017 to in 150,883 in FY 2018, a 6.3 percent rise. As a share of total endorsement count, cash-out was nearly 15 percent, compared to 11.4 per- cent in the previous year. The analysis pointed out a couple of reasons for the rise in this activity. First was the rising mortgage rates that have sig- nificantly curtailed rate refinances loans, which in turn were boosting the share of cash-outs. Second, according to the analy- sis was the 85 percent maximum loan-to-value (LTV) ratio for FHA cash-out refinances vs. 80 percent for conventional cash-outs. "In other words, borrowers can extract more equity through an FHA cash-out than a conventional one. Also, FHA cash-out refinances can be more cost-effective than conven- tional cash-outs for some borrow- ers because of a lower base FHA mortgage rate and FHA's non-risk- based pricing," the analysis said. The Monthly Chartbook also looked at default rates for the government-sponsored enterprises (GSEs) are much lower than they were a few years ago, accord- ing to an analysis of vintage loan level GSE credit data by the Urban Institute. The data was analyzed as part of the Institute's Monthly Chartbook for November. Looking at Fannie Mae and Freddie Mac's 1999-2003 vintages, the analysis revealed that cumulative defaults totaled around 2 percent while those for loans from 2007 were at around 13–14 per- cent. However, they began to fall starting with the post-2009 vintage of loans, which are on pace to fall below the pre-2003 levels. The analysis revealed, for Fannie loans 88 months after origina- tion, the cumulative default rate from 2009–10 and 2011–Q 3 2017 were about 0.96 and 0.37 percent, respectively, compared to the cu- mulative default rate from 1999–2003 of 1.35 percent. For Freddie loans 85 months after origination, the cumulative default rates totaled 0.94 percent from 2009–10 and 0.22 percent from 2011-Q 3 2017, com- pared to the rate from 1999–2003 of 1.24 percent. The analysis also looked at the status of the loan after it had expe- rienced a credit event (defined as a delinquency of 180 days or more, a deed-in-lieu, short sale, foreclosure sale, or REO sale) and found that for Fannie Mae loans 14.7 percent were current, 16.1 percent were prepaid, 10.2 percent were still in the pipeline, and57.8 percent were already liquidated. Freddie Mac loans also showed similar results. Refinances Take a Turn After several months of decline, refinances began to shift. A ccording to the Fed- eral Housing Finance Agency (FHFA) Refinance Report, the average interest rate on a 30-year fixed rate mortgage rose to 4.83 percent in October, up from 4.63 percent in September. Total refinance volume increased in October after falling throughout most of the year. The report notes that borrowers completed 507 refinances through HARP in October, with the total refinances since the program's inception now up to 3,493,512. HARP refinances make up just one percent of the total refinance volume nationally, and six percent of the loans refinanced through HARP had a loan-to-value ratio greater than 125 percent. According to the FHFA, the decreasing refinance volume throughout the rest of the year was a reaction to rising mortgage interest rates. Additionally, The FHFA states that borrowers who refinanced through HARP had a lower delinquency rate on average compared to borrowers who were eligible for a HARP refinance, but did not refinance through HARP. As of October 2018, borrowers with loan-to-value ratios greater than 105 percent accounted for 16 percent of the volume of HARP loans. The report also notes that nine states and one territory (Puerto Rico) accounted for over 70 per- cent of the nation's HARP eligible loans with a refinance incentive as of June 30, 2018. Puerto Rico made up the largest number of HARP eligible loans, at 4,522, closely followed by Illinois with 4,511. Other states with high numbers of HARP eligible loans include New Jersey, Florida, Michigan, Ohio, Pennsylvania, Maryland, Alabama, and Georgia. In total, 38,818 loans were eligible for the HARP refi- nance initiative as of June 30, 2018. In Florida, Georgia, and Illinois, HARP refinances represented two percent of total refinances compared to one percent of the total nationwide. In several states, underwater borrowers made up a large portion of HARP refinances. Underwater borrowers represented 20 percent or more of HARP refinances in Nevada, Florida, and Michigan.