Are Cash Out Refinances Gone?

Are Cash Out Refinances Gone?

Broker | Owner | Mortgage Consultant
Josh Lewis
Published on May 1, 2020
Josh Lewis BuyWise Mortgage Coronavirus mortgage market update

Are Cash Out Refinances Gone?

Welcome back, it’s Josh Lewis with BuyWise Mortgage.

Thank you for joining us. Again, we’re calling this Coronavirus mortgage update, but really just a market update at this point.

It’s Thursday and the last day of April…hopefully closing in on the last days/weeks of stay at home orders as things slowly start to thaw out to something approaching normal.

We’re going to discuss:

  • Fannie/Freddie Cash-Out refinance no longer available?
  • Current rate market update
  • Preview of a call I’m doing on the direction of home prices

As always, let me know if you have any questions

There’s some coronavirus driven changes, but for the most part, much like quarantine itself, it’s Groundhog Day in the mortgage market and the mortgage business so we’ll go through some things, give you an update on where interest rates are at, what has and hasn’t changed in the last week.

And most importantly, I’ll be doing a call either tomorrow or Saturday. We’ll try and post a link on my pages as well. But with one of my realtor partners, Jeb Smith, one of the biggest questions that everyone’s asking right now is what’s gonna happen with home values?

If you’re a potential buyer, buyers don’t really wanna get into the market ’cause they’re not sure what’s gonna be coming down the line with home values and the people that own, if they’re thinking of selling or moving, refinancing, people are just really concerned.

They’ve seen some of the numbers, so let’s jump in there and take a look at that. And then we’ll get to the groundhog day that looks a lot like what we’ve been seeing the last few weeks. So let’s bump this up so we can actually see it a little bit bigger.

Initial jobless claims. Again, moderating, so we had peaked up here at 6.8 million, 6.6 million. We’re all the way down to 3.8 million, which is only about 15 times what a normal week was prior to this. These are still really high numbers.

When you look and take into account continuing claims, unemployment’s at about 17%. Most people still think we’re gonna end up really close to 20% before this is all over. But anecdotally, I am seeing with several of my clients, people that I’m talking to, that some folks are going back to work.

Some states and some businesses are trying to get back to normal and open up. The paycheck protection program loans are helping some employers bring employees back online. So I’ve seen a few of those. So expect these numbers will get better, but it’s gonna take a year or two before we get back down anywhere near what normal numbers were.

So another figure that we saw this week was pending home sales. This is existing homes; not new construction, but existing homes like you would go out and find in the MLS and purchase. So down 20% over year over year, or month over month. 16% year over year.

Now, what we’re gonna point out and what Jeb and I are gonna talk about in the call tomorrow is this is totally to be expected, and it’s not reflective or indicative of what’s happening with home prices. We’re not gonna get a good read on home prices for another month or two.

But there’s a million reasons why we’re unlikely to see a substantial move down in home prices. So this was pending home sales, this here is existing home sales, or new home sales. So builders build a new home, put it up. Also, way down. Not down as much as existing homes, but down 10%.

And that largely could be ’cause it’s a little bit older data. So everything that we’re seeing for March, we get the stay-at-home orders, people are getting more and more concerned about coronavirus. They’re not out buying homes.

So we’re seeing less homes on the market, less buyers in the market for those homes and less volume in the market. Now these numbers here are not really helpful for us. This is the Case-Shiller index for the month of February, so before anything really jumped off.

And the only reason why I wanted to point this out here is .5% month over month gains in home prices nationally, 4.2% annually. And you look at some of these areas; the top cities monthly were Seattle at 1.3, Tampa at 1.0, Minneapolis at .9, Phoenix was up 7.5% year over year, Seattle is still hot, 6%.

So long way of saying we had a strong market with strong year over year gains before this happened. So there’s a million reasons for it. We’ll go into more detail on that call tomorrow. So looking at it, we can then jump in here.

This is just another index, the Federal Housing Finance Authority does their home price index. Also, for February, up 5.7% year over year, so just strong numbers year over year heading into this. We have strong demographics.

Millennials are entering their prime buying age, which is a little bit older than previous generations. But that cohort is the largest generation we’ve seen since the baby boomers, and they are now entering prime home-buying age.

So we have headwinds in terms of jobs and employment, and just people feeling overall security. But when you have people reaching life stages where they’re ready to purchase, we had strong fundamentals underlying the market, and we still have a supply-demand in balance that’s likely to continue existing, and most markets don’t really think we’re gonna see a sustained drop in home prices.

We can certainly see individual home prices, certain neighborhoods struggling over the next few months as some sellers have to sell, and they come into the market, if they have to take a discount in the current market to get a property move, you could see some small moves down.

But year over year, two years from now, we’re gonna see home prices higher than where they are. We might not be seeing this four, five percent year over year growth. It might only be one, two, three percent, but home prices are gonna hold up really well. This is not 2008.

So now we get to the groundhog data. You’ll see, this channel I put here from top to bottom over the last 30 day, largely due to the fed buying, feds putting a floor underneath the market with buying mortgage back securities. This is a 125 basis point range from top to bottom.

That’s a quarter of a percent move up or down in rates over the last 30 days and over the last 15 days, that’s narrowed to about 65 basis points or an eighth in interest rate. And we’re likely to see this.

One thing I do wanna point out here, we have the 25-day moving average is moving up, and that’s support, and then we have resistance up here that kinda is our all-time high that we hit about three times and never could breakthrough.

Any time you have a move like this sideways, you usually get a breakout pretty strongly in one direction or the other. So if we lose the 25 day average, we could come down and test this number. But still it’s maybe an eighth or so worse than where we’re at right now.

If we go through here, it’s totally uncharted territory. Don’t know how high mortgage bonds can go, and interest rates can go lower just because literally we’ve never been there. If you were watching the news this week, every Thursday Freddie Mac releases their primary mortgage market survey.

I believe their number for this week was 3.24% on the average 30 year fixed. Couple things to remember: it’s a national average and it also includes some amount of points in there, usually somewhere between .4 and .6 points.

So this next sheet here, we always like to quote where we’re at, we quote these at zero points for the most part. When they’re not zero points, we’ll point that out. So standard balance loans: loans under 510,400.

Conventional’s at three and a quarter for your best-qualified borrower’s lowest loan to value, highest FICO rate and term and purchase loans.

FHA’s at 2.875, actually have one at 2.75 with zero points but that’s one and only one. Have several lenders in that 2.875 range.

VA is joined FHA there at that 2.875 level. So the high balance stuff is where we’re still having trouble, but if you’ve been watching this for the last three, four, five lives that we’ve done here and gone through these numbers, it’s definitely getting better.

For the best-qualified borrowers, so again, low loan to value, high FICO, three and three eights is down to about a quarter cost on the high balance, and that’s the best we’ve seen in weeks.

FHA 3.325% with zero points, and VA three and three eights with one point. Want to post a comment up here. We’ve got a viewer, and I’m hoping I’m saying this correctly, Rafshad Ahmed or Ahmed, can you please let me know the rate for high balance FHA? I’m not sure if I should lock the rate now.

I’m closing in the middle of July. So one of the things that you wanna pay attention to is if you were to lock today, to get to the middle of July, we gotta go forward to the end of May, end of June, middle of July. That’s like a 75 day lock.

The things that have gotten much much more expensive through this process are the long-term locks. So you’re gonna probably want and need to get inside of 60 or 45 or better yet, 30 days. And I do believe this is gonna continue to moderate. Rates are gonna stay low.

The high balance issues are going to moderate, and the shorter term lock you get to, the better off you’re gonna be. So Rafshan, hopefully that’s helpful. If you’re here in California and wanted some information, contact me offline, or if you need a contact to a good lender in another state, we have a huge network and can connect you there.

So that’s the big info that we have for this week. I always like to talk about In The News, or at least in my inbox, what are we seeing? So here’s more of the same. Cash out loans are getting very expensive, so we talk about purchases and rate and term refinances are great.

A week ago for Fannie Mae and Freddie Mac loans, the HFHA announced some relief for mortgage servicers for loans that go into forbearance, brand new loans that go into forbearance. Ones that were accepted from that are cash-out loans.

As a result, lenders and servicers have been deciding over the week what’s their level of risk, how do they price it, and they’re all reacting differently, and primarily reacting with loan level price adjustments. That’s what an LLPA is.

And it just means that we basically start out with a base rate for any loan program, and then it goes up from there with loan level price adjustments. If you wanna take cash out, it’s a little bit more expensive. If you have a slightly lower credit score, that’s a little bit more expensive.

While the cashout LLPAs are getting big, in some situations, a couple hundred basis points. Rafshan, you are very welcome. I’m glad we were able to help. They’re looking at higher FICO requirements. Lot of times if you don’t have a 700 credit score, some lenders just do not want to make that loan.

So they’ll do them at a lower loan to value, do it with a higher FICO, and they’ll do it for borrower’s with cash reserves. And there’s a very good reason for that. If one of these loans goes into forbearance before that first payment, they cannot sell that loan.

That is a big risk to them, and they’re trying to make those cash-out loans only to the borrowers that are least likely to default or need forbearance. Another continuing trend that we’re seeing here is the HELOC’s are disappearing or getting much more restrictive.

One of my lenders that would go to 90 is now at 85. One of our lenders is out of the market entirely, and the credit union that we have that is still doing those loans to higher loan to values is increasing their credit score requirements, requiring some reserves, and keeping your debt-to-income ratio lower.

So at the same time, we’re seeing some things slightly ease on the standard balance stuff, on the rate and term, on the purchase, so I expect, as long as the news remains positive on the coronavirus issue, even if it’s just slowly and slightly better, as long as we’re not getting negative news, we should see a slow thaw in mortgage rates, mortgage guidelines.

So again, if a loan makes sense today, if you’re purchasing today, if the numbers for a refinance make sense today, I wouldn’t wait. If it makes sense today, take advantage. I do believe in the long run this is gonna be deflationary. We’re gonna see better interest rates.

How low they can go is the giant question, and how long it takes. Is it six months from now, is it 18 months from now? Before we get to the end of this, we’re gonna see a more normal market with some really good interest rates.

If you have questions on that, we are always here and available to answer questions. I’ve talked to many of you this week. Whether it’s questions about forbearance, potentially refinancing, what your options are, it’s a confusing market.

We have really really well-qualified borrowers that have an issue like a rental property; we need the rental income to qualify. A lot of lenders are not allowing that. Some are, some aren’t. So just looking at all of that information, it’s never been more confusing for consumers ’cause it’s never been more confusing for us, as professionals.

So from that perspective, definitely wanna let you know we’re here. We’re always available to talk. If you’re around tomorrow, let me actually post here in the comment section, that’s the link to Jeb Smith’s website or YouTube channel.

And we’re gonna be doing, I’m not sure if we’re gonna do it live or just record it and post it there. But we’re gonna really drill down, probably take 20, 30 minutes, go into all the fundamentals of why I do not believe home values are going to be decreasing in the long term.

Again, we can see anything happen over the next three to six months. But one year, two years out, we’re gonna see home values higher than where they are right now. Not predicting a huge run-up, but this is not 2008, it is not going to hurt home values in the long run.

So again, thanks for tuning in. I hope we got your questions answered. I hope we gave you some information that’s actionable that you can work with. If you need anything, reach out.

We’re just a phone call, text, or an email away. All right, have a great night.

Broker | Owner | Mortgage Consultant
Josh Lewis Broker | Owner | Mortgage Consultant
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(714) 916-5727

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