Cash-out party not over yet

From MarketWatch:

Cashing out

People looking to extract equity from their homes have increasingly been turning to cash-out refinancing, industry observers say.

A big reason that people are tapping their equity through refinancing comes down to dollars and cents, according to Amy Crews Cutts, deputy chief economist with Freddie Mac. Because home-equity loans and lines of credit are most often tied to the prime rate, now at 8.25%, those options have gotten more expensive even as long-term mortgage rates have remained relatively low, with the 30-year loan averaging about 6.2%.

Freddie Mac said 89% of the loans it owns that were refinanced in the third quarter of 2006 had loan amounts at least 5% higher than the original mortgage balances, the threshold for considering a loan a cash-out refinancing. It’s the highest share of cash-out refinance loans reported since 1990.

Consumers cashed out a total of $82.8 billion during the quarter, down somewhat from $90.6 billion in the second quarter, according to Freddie Mac.

Banks are seeing results of the cash-out trend, too.

“Banks have been reporting that they have not been getting the business of home-equity lines as they had been before,” Cutts said.

According to the American Bankers Association, the dollar amount of home-equity loans (including loans made through home-equity lines of credit) has increased by an annualized 14.6% for the first three quarters of 2006, compared with all of 2005. That’s down from a 17.4% increase in 2005 and a 31.2% increase in 2004.

Overall, borrowers also need to be honest with themselves before tapping their home equity, especially if the reason for the cash-out isn’t a one-time cost, said Jennifer Wheary, a senior fellow at Demos, a nonpartisan public policy research and advocacy organization. She recently completed a report on the issue of home-equity extraction.

“In the short-term, they will feel a sense of relief,” she said, referring to those who use the cash to catch up with such things as credit-card payments or medical expenses.

But the relief will be fleeting if they find themselves in the same situation — and this time without the cushion of home equity to fall back on, she said.

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11 Responses to Cash-out party not over yet

  1. SAS says:

    Big…. Big mistake.

    People, your house is not an ATM.

    SAS

  2. looking says:

    anyone with mls access –

    can you please tell what this house sold for:

    14 lehigh drive, kendall park, nj 08824

    Thanks!

  3. Richard says:

    hey clotpoll, i told you the other day indy and the over. i win :)

  4. Richard says:

    nice thing about borrowing on a HELOC is you can write off the interest unlike CC’s. you also don’t get the amortization over some fixed period. a mechanism like a HELOC is a great tool IF you use it wisely.

  5. BC Bob says:

    Clot,

    Sorry!! Went with Richard on both the points and over.

  6. Jay says:

    “nice thing about borrowing on a HELOC…”

    There’s nothing nice about borrowing.

    I guess I’m kind of traditional, as I hate borrowing, especially for consumption. You are simply trading away your future for instant gratification, and paying a major premium to do it.

    Owing a large debt will enslave you and limit your future options. In effect, the bank owns a large chunk of of your life. If you have to take a HELOC to make ends meet, it means you can’t afford your house and lifestyle (unless it’s due to a temporary situation like job loss). Either cut back on unnecessary expenses or sell your house and rent. Otherwise, you could be digging a black hole with no escape, and you will lose your house anyway.

    If you must borrow, credit card debt is preferable even though you can’t write it off. That’s because if you can’t pay your credit card, they can’t foreclose on your house…

  7. fyi from http://housingpanic.blogspot.com/

    FLASH: Cash-back mortgage fraud scam sweeping Arizona (and the US): “could erode confidence and values in Arizona’s real estate market”

    Sunday, January 21, 2007

    ARIZONA HOUSING IMPLOSION CODE RED!!!!

    Nice again to see the MSM (and the lazy Catherine Reagor!) FINALLY reporting on the meat of the housing bubble ponzi scheme, although the cat is way out of the bag now.

    Greg Swann’s Phoenix Arizona may in the end be the epicenter of not just the housing bubble, but also mortgage fraud. Why? Because there are no real jobs in Phoenix. Just a bunch of high school GED’s gaming the system with mortgage fraud, fake appraisals, and the REIC spinning out of control.

    Oh, man, this is going to end so ugly. Someone get the paddywagon, we got a bunch of ‘em to put in jail when this is over. And billions, if not trillions, in fraudulent loans. Fannie, Freddie, hedge funds, Countrywide shareholders and China should be a bit nervous right about now.

    Valley fighting mortgage fraud wave

    A wave of mortgage fraud is rippling through pockets of the Valley, inflating home values through scams called cash-back deals.

    Left unchecked, cash-back deals cost homeowners and lenders millions of dollars and could erode confidence and values in Arizona’s real estate market.

    The fraud involves obtaining a mortgage for more than a home is worth and pocketing the extra money in cash. Neighbors may then discover home values in the area are exaggerated.

    Homeowners stuck with overpriced mortgages may never recover the difference. And lenders end up with bad loans that, in the long run, could hurt the Arizona real estate market, the largest segment of the state economy.

    “Arizona was like a housing gold rush for speculators from California, Florida and Texas a few years ago,” said Detroit real estate agent and fraud activist Ralph Roberts, author of the book Flipping Houses for Dummies. “But home prices stopped climbing, and speculators got greedy. Now the cash-back scam is going to make the savings and loan crisis of the 1980s look like a soft landing”

    great article to read and pass on !!!

    http://www.azcentral.com/news/articles/0120mortgagefraud0121.html

  8. pesche22 says:

    But I needed the rims for my SUV.

  9. R Patrick says:

    YoYoYoWassup! here ( I am called that because thats how I start every convo ) , I heloced my condo to get the downpayement for my Lexus GS350 lease, my BOYEEE!!! he got the new infinity.

    See we be balling, my parents work so hard their whole life and drive a POS beater, we be mid twenties and already made it. Those biachez be seegin us and riding our Jocks now hard!

    Yoyoyo IN DA HOUSE!!!!

  10. bergenbubbleburst says:

    people are still doing cashe out refinancings?, And a psoter trys to tell us that is a postitive.

    Gee, and we are the League of Dorks?

  11. Freddie says:

    The sad of cashing out equity is when the homeowner then wants to turn around and sell the property (usually well overpriced)expecting a financial gain. All I can say is, “I’m sorry. It does not work that way. If you take out the equity through cash out overpricing won’t get it back for you.
    Sellers can be unbelievably naive in financial matters.

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