An increase in the volume of cashout originations is creating more risk for mortgage investors, according to a new ratings agency report.
Although rising home prices have created more equity for mortgage holders, it is also motivating homeowners to extract equity from their homes
Cashouts are increasing on loans backed by the government-sponsored enterprises and on mortgages included in private-label securitizations.
Those details were discussed in
Increased Equity Borrowing Is Reducing Benefits of Home Price Appreciation from Moody’s Investors Service.
The increase in home-equity extraction is hurting the quality of new residential mortgage-backed securities.
Even jumbo cashouts have risen. In 2014, average cashout was less than 8 percent of jumbo mortgage originations. Last year, the share soared to more than 17 percent.
As more borrowers pull cash from their homes, the volume of second-lien originations is rising.
The ratings agency said that the number of
home-equity loans originated has gone from fewer than 600,000 units in 2012 to more than 800,000 in 2016.
The number of home-equity lines of credit opened has gone from under 900,000 to more than 1.4 million during the same time period.
As more second-lien
HELs and HELOCs are originated, the risk on the first mortgages is increasing.
“Stronger underwriting standards and operational practices relative to those that were prevalent prior to the financial crisis will help mitigate the negative effects of these trends, especially if home price gains continue,” the report stated. “However, as loan products used for equity extraction regain favor with lenders and consumers, the risks could increase, especially if home prices decline.”
