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New FHA cash-out refi rule curbs financing for moderateincome borrowers

Rules taking effect Sept. 1 will limit Federal Housing Administration refinances to 80% of your property's value.

By Jeff Lazerson

8/8/19

What I think: Ticktock. You have until Aug. 31 to cash out up to 85% of your property’s value by refinancing your Federal Housing Administration loan. Starting Sept. 1, new rules kick in limiting FHA cash-out refinancing to 80% of your property’s value.

I cannot believe that FHA Commissioner Brian Montgomery along with President Trump secretly think the real estate sky is about to fall with this nonsensical move to cut back on FHA cash-out refinances. Backing up the decision to cut back on cash-out, an FHA spokesman points to more than a 250% increase in FHA cash-out refinances from fiscal year 2013 to fiscal year 2017.

So what?

Those loans are performing nearly perfectly according to HUD’s own data.

A June 2019 FHA Single Family Loan Performance Trends report indicates less than 0.5% of FHA cash-out refinances are in foreclosure. Almost nil.

Compare that to FHA no cash-out and FHA streamline refinance loans that have slightly higher foreclosure rates. And, conventional (Fan and Fred) cash-out refinances in foreclosure are more than double of those FHA cash-out refi’s at 1.15%, according to this report.

Just this week, Attom Data Solutions released a report indicating an 18% drop in national foreclosure filings from the same period one year ago and down 82% from its 2010 peak.

I’ve arranged well over 1,000 FHA mortgages in my career, many of which were cash-out refinances. Primarily, these were working-class families that initially put 3.5% down.

They paid their mortgages down and benefited from property appreciation. Moreover, they seriously considered the opportunity and benefit of using the cashout for home improvement, consolidating debt through a lower interest rate and the like.

Yet, Commissioner Montgomery knows better by cutting back on FHA benefits without any reduction in the FHA mortgage insurance premiums. He said in part, “We are taking another important step to support sustainable homeownership that builds wealth for families.”

Yah. Right.

Being able to maximize your home equity is the most affordable means of leveraging your equity. In Los Angeles and Orange counties, the FHA loan limit goes to $726,525. In San Bernardino and Riverside Counties, the loan limit is $431,250.

Distributed to very few selected lenders, Freddie Mac offers very hard-to-find 85% cash-out refinancing (you must have at least a 740 middle FICO score) for up to $484,350 for all four counties.

The pricing for a zero-point loan including the mortgage insurance is about 4.9% through one local lender. Comparably, we are looking at 4.175% for an FHA loan (which accounts for all FHA mortgage insurance for the same loan amount).

Or, you can get a second lien, a home equity line-of-credit or fixed-rate that starts around 6% for the most wellqualified borrowers and runs to nearly 10% — again, if you can qualify.

Our government is blocking many lower-wealth borrowers from maximizing their cash-out for the most hollow of reasons. Shameful for sure.

Mortgage broker Jeff Lazerson can be reached at 949-334- 2424 or jlazerson@mortgagegrader.com. His website is www.mortgagegrader.com.