Trump administration to cap Americans' ability to tap home equity

1 Reply | Louisville, Kentucky

I support this. This only applies to FHA loans.

Context:

  • FHA for an owner occupant was the only Agency loan product (excluding VA) that would do 85% LTV cash out refinances. Everything else is between 70% to 80%.
  • That extra 5% on FHA cash out refinances meant taking on mortgage insurance and paying the 1.75% UFMIP. That extra 5% was marginally at about the same cost as a hard money loan.... 1.75% one time plus 0.85% per year for just another 5%. That means the price of this extra 5% was 35% of the extra 5% in upfront fees (1.75 divided by 5). Plus another 0.85% on the entire loan balance per year.
  • FHA loans will always go for lower FICO scores, and bruised credit. Also DTIs over 50%.

No single one of the above is in itself a big deal, but combine them together and virtually every single 85% LTV FHA cash out refinance was a homeowner coming from a place of desperation. I've not once, ever, done a BRRRR-related 85% LTV cash out refinance, usually people doing that are refinancing out of FHA and into conventional to drop the mortgage insurance. 85% LTV FHA Cash Out refis are either FHA-to-FHA, or conventional-to-FHA, the opposite of what BRRRRrrrr people are doing (FHA-to-conventional)... these people are refinancing to sign up for mortgage insurance, all for that little extra 5% (they they are paying 35% of it towards fees) they want.

And these are FHA loans, which means government insured, which means taxpayer on the hook. Your typical 85% LTV Cash Out FHA refi is/was the habitual debt addicts, the folks who rack up $30k in credit card debt, and every few years consolidate it into an FHA cash out refi, a lifestyle choice predicated on assumptions about real estate appreciation continuing forever. This is the last remnant of "partying like it's 2007" when it comes to mortgages. The taxpayer doesn't need to be on the hook for that. 

85% LTV cash out refinances should be non-QM, non-Agency, in no way backed by the full faith and confidence of the US Federal Government or any entity owned, insured, backed, or anything remotely similar. Pure 100% private sector loans, should the private sector elect to do them. Right now, "we the people" are on the hook for these debt addiction feeding refinances.