The Department of Housing and Urban Development (HUD) is reducing the amount of equity that can be withdrawn from a home using either a Federal Housing Administration (FHA) or a Veterans Administration cash-out refinance. The new rules will limit the loan-to-value (LTV) ratio of FHA loans to 80 percent and VA loans to 90 percent.
The FHA LTV limit for cash-out refinances is currently 85 percent. That change will apply to loans with case numbers assigned on or after September 1.
The memorandum from HUD announcing the reduction says the department is taking action "to mitigate risks to the FHA Insurance Fund associated with increasing levels of insured loan balances on cash-out refinance mortgages. This new requirement is a prudent safeguard that permits FHA to ensure it stays ahead of any shift in housing stability."
FHA says the number of its endorsements with cash-out refinance mortgages has increased 250.47 percent - from 43,052 in FY 2013, which had the lowest share of cash-out refinances - to 150,883 in FY 2018. and made up 63 percent of all the agency's refinancing guarantees during that period against 39 percent in the 2017 fiscal year.
The announcement from FHA says the last adjustment to the maximum LTV on cash-out refinances was in 2009 when it was reduced from 95 percent to the current 85 percent in response to the weakening housing market. Prior to that change and similar ones by other lenders and guarantors the share of cash-out refinances had increased rapidly (at times exceeding 80 percent of all refinances). Subsequent studies have shown that a significant increase in foreclosures may have been the result of a high number of cash-out refinances completed prior to the collapse of the housing market.
Ginnie Mae, also a HUD agency, securitizes loans guaranteed by FHA and by the VA. Its press release also issued this morning states that its new pooling criteria for cash-out refinances of VA loans will reduce the maximum LTV from 90 percent. The agency said those loans with a resulting LTV above that limit will be ineligible for Ginnie Mae I single Issuer and Ginnie Mae II Multiple Issuer Pools effective November 1. They may still be pooled into Ginnie Mae II Custom Pools if they meet seasoning and number of payment requirements needed for those pools.
Both HUD and Ginnie Mae state that their respective changes move those requirements closer to that of Fannie Mae and Freddie Mac.