FHA cracks down on cash-out refinancing

WASHINGTON — The Federal Housing Administration will limit cash-out refinancing starting next month in an effort to reduce the amount of borrowers withdrawing money from the value of their homes, the agency announced Thursday.

As of Sept. 1, the FHA will allow cash-out refis only for up to 80% of the value of a borrower's homes, down from the current maximum loan-to-value ratio of 85%.

In a related move, Ginnie Mae also announced Thursday that in November it will implement new eligibility requirements for cash-out refinance loans that are guaranteed by the Department of Veterans Affairs. Ginnie will no longer permit loans amounting to 90% of a home's value to be pooled into securities.

The FHA said in a mortgagee letter that its "new requirement is a prudent safeguard that permits FHA to ensure it stays ahead of any shift in housing stability.”

“This policy change seeks to mitigate risks to the FHA Insurance Fund associated with increasing levels of insured loan balances on cash-out refinance mortgages,” the agency said.

In the FHA’s annual report to Congress in November, the agency said cash-out refi loans made up more than 63% of the agency's refinancing business last year, compared with just 39% in 2017.

“We are taking another important step to support sustainable homeownership that builds wealth for families,” FHA Commissioner Brian Montgomery said in a statement. “This is a prudent measure to make certain that we protect and preserve the home equity borrowers are building for their futures and guard against taxpayer losses from the FHA program.”

Fannie Mae and Freddie Mac both currently also have a loan-to-value ratio requirement of 80% for cash-out refis.

Ginnie's new requirements will align its policy more closely with that of the FHA, Fannie Mae and Freddie Mac, and will provide investors more certainty about the performance of securities, the agency said in a press release.

“Today’s announcement underscores Ginnie Mae’s commitment to ensuring the agency’s policies enable homeowners to borrow prudently, utilizing the government-guaranteed mortgage market,” Maren Kasper, the acting president of Ginnie Mae, said in the release.

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