Borrowers Are Tapping Their Homes for Cash, Even as Rates Rise

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mlebuf
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Borrowers Are Tapping Their Homes for Cash, Even as Rates Rise

Post by mlebuf »

That's headline's a story in today's online issue of "The Wall Street Journal." Here's how the article begins:
Rising mortgage rates are crushing much of the refinancing market. But Americans are still using refis to pull cash out of their homes.

More than 80% of borrowers who refinanced in the third quarter chose the “cash out” option, withdrawing $14.6 billion in equity out of their homes, according to government-sponsored mortgage corporation Freddie Mac . That is the highest share of cash-out refis since 2007.

The trend attests to the current state of the U.S. economy, which is more than nine years into an expansion that has lifted home values sharply but raised worker pay at a much slower pace. Now, many are finding their homes to be a tappable source of wealth.
For those with a subscription, here's the link to the story: https://www.wsj.com/articles/borrowers- ... _lead_pos4

I seem to remember a lot of people doing this very same thing about a decade ago. The result for many was like rearranging the deck chairs on the Titanic. But for those who can't learn any other way....
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PFInterest
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Re: Borrowers Are Tapping Their Homes for Cash, Even as Rates Rise

Post by PFInterest »

Ppl will spend no matter what.
And just because rates are rising doesn't mean they are high.....
retire2022
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Re: Borrowers Are Tapping Their Homes for Cash, Even as Rates Rise

Post by retire2022 »

Still lower than using credit card as long as ability to pay down debt, before the change in tax law people were able to itemize HELOC interest as part of home interest deduction.
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Random Musings
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Re: Borrowers Are Tapping Their Homes for Cash, Even as Rates Rise

Post by Random Musings »

No different than investors, margin debt reached a new all-time high earlier this year, but has declined during the current correction.

Will investor animal spirits get back on the margin train or continue to get out?

RM
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Nissanzx1
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Re: Borrowers Are Tapping Their Homes for Cash, Even as Rates Rise

Post by Nissanzx1 »

They will never learn I'm afraid. It's not a piggy bank...
Gnirk
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Re: Borrowers Are Tapping Their Homes for Cash, Even as Rates Rise

Post by Gnirk »

Nissanzx1 wrote: Sun Nov 25, 2018 11:17 pm They will never learn I'm afraid. It's not a piggy bank...
Sad, but true.
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Ketawa
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Re: Borrowers Are Tapping Their Homes for Cash, Even as Rates Rise

Post by Ketawa »

This is a terrible headline. Of course as rates rise, the primary reason for refinancing will be to take cash out, so 80% of refinances being for this reason is not surprising. What else are people going to do? The people who refinanced all the way to the bottom can probably hardly get a better deal on a 15 year mortgage. More interesting would be an examination of total refinancing activity over time, or total cash out refinancing over time. 80% of refinances being for cash out is not interesting.
btenny
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Re: Borrowers Are Tapping Their Homes for Cash, Even as Rates Rise

Post by btenny »

The real issue is if the new refinance loans are for 60% or 80% or 95% of current market value? If they are for 80% or more (which I suspect many are) then that is the real story. Those people will lose there homes when the next downturn hits. History repeats.........
deltaneutral83
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Re: Borrowers Are Tapping Their Homes for Cash, Even as Rates Rise

Post by deltaneutral83 »

btenny wrote: Mon Nov 26, 2018 11:25 am The real issue is if the new refinance loans are for 60% or 80% or 95% of current market value? If they are for 80% or more (which I suspect many are) then that is the real story. Those people will lose there homes when the next downturn hits. History repeats.........
I guess I don't understand how this is even good business for banks. If homes go down 25% in value in a recession (or worse) and you made a loan for 80% LTV, the bank is now in trouble, and even if bailed out by govt, exec's stock options get pummeled.
jebmke
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Re: Borrowers Are Tapping Their Homes for Cash, Even as Rates Rise

Post by jebmke »

deltaneutral83 wrote: Mon Nov 26, 2018 12:10 pm
btenny wrote: Mon Nov 26, 2018 11:25 am The real issue is if the new refinance loans are for 60% or 80% or 95% of current market value? If they are for 80% or more (which I suspect many are) then that is the real story. Those people will lose there homes when the next downturn hits. History repeats.........
I guess I don't understand how this is even good business for banks. If homes go down 25% in value in a recession (or worse) and you made a loan for 80% LTV, the bank is now in trouble, and even if bailed out by govt, exec's stock options get pummeled.
I'd be surprised if the banks are holding any of this paper.
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J G Bankerton
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Re: Borrowers Are Tapping Their Homes for Cash, Even as Rates Rise

Post by J G Bankerton »

Banks make money lending so banks will encourage taking cash out with a refinance. Before I got smart I got played into doing that.
btenny
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Re: Borrowers Are Tapping Their Homes for Cash, Even as Rates Rise

Post by btenny »

Somewhere around 80% of loans are sold in 30 days. So banks do not care long term about the loan quality. Plus the buyers buy "insurance" which is just another name for credit swaps and other funny paper to claim they are not taking risk on the loan..... And in the case of Fannie and Freddie who buy a lot of loans I have no clue how they propose to handle their loan portfolio risks.
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Re: Borrowers Are Tapping Their Homes for Cash, Even as Rates Rise

Post by KlangFool »

jebmke wrote: Mon Nov 26, 2018 1:38 pm
deltaneutral83 wrote: Mon Nov 26, 2018 12:10 pm
btenny wrote: Mon Nov 26, 2018 11:25 am The real issue is if the new refinance loans are for 60% or 80% or 95% of current market value? If they are for 80% or more (which I suspect many are) then that is the real story. Those people will lose there homes when the next downturn hits. History repeats.........
I guess I don't understand how this is even good business for banks. If homes go down 25% in value in a recession (or worse) and you made a loan for 80% LTV, the bank is now in trouble, and even if bailed out by govt, exec's stock options get pummeled.
I'd be surprised if the banks are holding any of this paper.
+1.

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Re: Borrowers Are Tapping Their Homes for Cash, Even as Rates Rise

Post by KlangFool »

mlebuf wrote: Sun Nov 25, 2018 7:15 pm That's headline's a story in today's online issue of "The Wall Street Journal." Here's how the article begins:
Rising mortgage rates are crushing much of the refinancing market. But Americans are still using refis to pull cash out of their homes.

More than 80% of borrowers who refinanced in the third quarter chose the “cash out” option, withdrawing $14.6 billion in equity out of their homes, according to government-sponsored mortgage corporation Freddie Mac . That is the highest share of cash-out refis since 2007.

The trend attests to the current state of the U.S. economy, which is more than nine years into an expansion that has lifted home values sharply but raised worker pay at a much slower pace. Now, many are finding their homes to be a tappable source of wealth.
For those with a subscription, here's the link to the story: https://www.wsj.com/articles/borrowers- ... _lead_pos4

I seem to remember a lot of people doing this very same thing about a decade ago. The result for many was like rearranging the deck chairs on the Titanic. But for those who can't learn any other way....
Why are you surprised by this?

1) People want/need to spend to keep up their lifestyle

2) But, their salary is not keeping up with the inflation.

3) Hence, they borrowed from the house to make up the difference.

KlangFool
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Re: Borrowers Are Tapping Their Homes for Cash, Even as Rates Rise

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