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April 2023 » 55 J O U R N A L April 2023 CASH-OUT REFIS COULD TRAP MANY BORROWERS R isky loans were a key player in the leadup to the 2008 housing crisis, and according to a research brief from the American Enterprise Institute (AEI) and the Center for Responsible Lending (CRL) borrowers should be wary of cash-out refinance mortgages—even those backed by the government—because using your home as an ATM can trap borrowers and worsen their financial stability for years to come. These loans, which can sometimes target lower-income borrowers of color, show that cash-out refinancing in the current high-in- terest rate environment can lock homeown- ers into higher monthly payments, raising concerns that government guarantee policies are promoting irresponsible lending to vul- nerable parties. Borrowers with credit scores below 660 constitute an increasing share of FHA and VA cash-out refinance borrowers. According to the AEI and CRL, cash-out refinances in today's higher-rate mortgage market can make borrowers worse off finan- cially because extra interest will be tacked onto the original mortgage. "Many lenders offer cash-out refinance loans to give consumers a quick infusion of cash to consolidate and pay off debt, meet everyday living expenses, or make repairs," AEI said. "However, the AEI Housing Center and CRL warn that many cash-out refinancing offers, including for government-guaranteed mortgages, may pose risks for borrowers, including: » Monthly payments up to 37% higher from refinancing the old mortgage into a higher rate loan » Tens of thousands of dollars of addition- al interest paid over a typical mortgage holding period (based on a 30-year fixed rate loan at about 6.5% today, vs 3%-4.5% in 2015)." "Low wealth, lower credit score, and vet- eran homeowners deserve better alternatives for borrowing cash through accessing their home equity in today's high interest rate environment without eroding their long- term financial health," said Mike Calhoun, President of CRL. "Consumers also should have access to clear and reliable information about the financial consequences of cash-out refinancing." "A broader availability of HELs and HELOCs at risk-based, market interest rates will save consumers money and preserve their equity while opening up a new line of business for financial institutions," said Ed Pinto, Director of the AEI Housing Center. "Even at interest rates closer to credit card rates, HEL and HELOC loans allow FHA or VA borrowers to access their home equity at a lower overall cost than the cash-out refinance loans currently being marketed by nonbank lenders." INDEPENDENT MORTGAGE BANKS REPORTED NEARLY $3K LOSS ON NEW ORIGINATIONS I ndependent Mortgage Banks (IMBs) and other mortgage subsidiaries of all chartered banks during Q4 2022 experienced a net loss on every mortgage origination, reporting they lost $2,812 on ev- ery loan according to the Mortgage Bankers Association. This number is down by $624 from Q3 2022. "For the third consecutive quarter, the average pre-tax net production income was in the red, reaching a new survey low of 99 basis points of loss in the final three months of 2022," said Marina Walsh, CMB, MBA's VP of Industry Analysis. "Fourth-quarter results were abysmal. Basis-point revenues dropped to levels not seen since the fourth quarter of 2011. Production costs reached their highest levels since the inception of MBA's report, and production volume has now declined for eight consecutive quarters." Added Walsh, "This has been a chal- lenging time for mortgage originators, with cost-cutting measures, including layoffs, not being enough yet to turn the tide. Even when all business lines are considered—both mort- gage production and mortgage servicing— only one in four companies were profitable in the fourth quarter of 2022." Walsh further noted that average loan balances dropped by 4%, indicative of a moderation in home-price growth. Based on MBA's latest forecast, total industry volume is expected to pick up starting in the second "Consumers also should have access to clear and reliable information about the financial consequences of cash-out refinancing." —Mike Calhoun, President, Center for Responsible Lending

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