The psychology of cash-out refis

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Hello LOs!

Today, Fannie Mae released its second quarter earnings, and so far, the GSE is still enjoying a boost from refis. Will it ever end?

Refinances accounted for most of its acquisitions, even with a $30 billion bump in purchase loan acquisitions.

Many predicted refinances would taper off as rates fell back down to more moderate levels this year. But Treasury yields are still down, mortgage rates haven't been able to stay above 3.0%, and refinances are still coming in, even if it's not quite the firehose we saw in 2020.

Fannie Mae also predicted that home price appreciation's skyward trajectory would continue, reaching 14.8% in 2021. That stunning increase in home price appreciation could spur more cash-out refinances, Fannie Mae said in a filing.

Cash-out refinances made up 21% of Fannie Mae's acquisitions in the first half of 2021, vs 19% in 2020.

Of course, early on in the pandemic, the Federal Housing Finance Agency said it would not buy cash-out refinances in forbearance, leading mortgage lenders to initially tighten credit standards and raise fees for cash-out refis.

But that becomes less of a concern as forbearance draws to a close. A loan officer in the San Fernando valley region of Los Angeles told me he is now seeing more cash-out refinances to pay for major home improvements.

"Kitchens, bathrooms, pools," he said. "Many clients are finding they can have the new work done and keep a similar payment to what they have now."

Cash-out refis — assuming agencies don't limit their purchases — may certainly be easier than navigating the complex renovation loan process.

One LO in Michigan told me that when it comes to refinancing, low rates are, overwhelmingly, the deciding factor. But borrowers are grappling with concerns over economic instability, too. He said the pandemic "shock factor" has fueled concerns about unknown factors that could impact jobs, and that, in turn, is leading people to refinance and tuck that money away.

"The days of people using their homes as a 'piggy bank' to fund vacations, autos and luxury items are behind us at least for now," he said. "Most people are looking ahead and trying to figure out what could go wrong and how to be better prepared financially if such an event occurs."

Refinances have already begun to wane, despite refinance incentives increasing. Black Knight's secondary marketing technologies president Scott Happ said that conundrum "had more to do with borrower psychology."

So, LOs, have we reached refinance saturation? Or will low rates and concerns about a more transmissible Covid variant impact borrower sentiment and fuel another wave of refinances?

You can send me an anonymous message at gkromrei@housingwire.com

Georgia Kromrei

Senior Mortgage Reporter, HousingWire

Fannie Mae lifted by low rates, purchase mortgages in Q2

Fannie Mae continues to reap the rewards of low mortgage rates. It posted a net income of $7.2 billion in Q2 2021, up from $5 billion the prior quarter