April 26, 2018

Analysis: Rampant Refis Ignited Housing Crisis

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Analysis: Rampant Refis Ignited Housing Crisis

Mortgage refinance activity may have been the true hidden culprit behind the housing crisis, according to a new report by the Urban Institute written by Laurie Goodman, codirector of UI’s Housing Finance Policy Center. 

Mortgage refinances were more likely to default than mortgages taken out to purchase a home “mostly because many people were treating their homes as ATMs through cash-out refinances,” Goodman notes.

Eighty-four percent of government-sponsored enterprise refinances in 2006 and 2007 were cash-out refinances. These types of refinances at that time tended to have “sloppier underwriting” and thus tended to default more than purchase loans, Goodman notes.

The analysis notes that between 1999 and 2015, 4.48 percent of refis and 3.3 percent of purchase loans were more than 180 days delinquent. In 2007, the peak year, 15.78 percent of refis and 9.95 percent of purchase loans were more than 180 days delinquent.

“Conventional wisdom suggests that refis should be less risky than purchase loans and default less because the borrowers have a known history of payment,” Goodman says. “So these results are surprising, especially given the stronger credit characteristics of refis, such as lower loan-to-value and debt-to-income ratios.”

Many housing experts blamed government policies aimed at increasing first-time home buyers for spawning the housing crisis. But the new report shows that “although there is a lot of blame to go around for the poor quality of loans before the housing crisis, the data reaffirms that purchase borrowers were not the primary culprits,” Goodman writes.

Source: “Using Homes as ATMs, Not Homebuying Fervor, Was More to Blame for the Housing Crisis,” Urban Institute (May 11, 2017)