Cash-out refinancing, home equity lending may come to a halt 

Mortgage lenders are charging more, cutting back on loan sizes or shuttering equity lending altogether.

Who can blame the mortgage lenders now?

More than 36 million Americans lost their jobs in the past eight weeks. Nearly 15% of the U.S. workforce is unemployed, according to the U.S. Bureau of Labor Statistics.

Fed Chair Jerome Powell warned this week, “The scope and speed of this downturn are without modern precedent, significantly worse than any recession since World War II.”

Oh, the good old days!

Mortgage lenders used to calculate their rich returns for cash-out mortgages by marking up their cost of funds. Now, they are starting to worry about whether they will ever see a return on their investment.

Nearly 8% of all mortgages are now in forbearance, according to the Mortgage Bankers Association. Builder survey data show new home loan applications plunged 25% from March to April.

Foreclosure moratoriums, temporary mortgage payment forbearances and loan modifications are good temporary time-buying salves. But, sooner or later, it will be time to pay up.

Just how quickly will those jobs come back? Will it be in time to replenish your checking account so you can cover your mortgage? How many will recover before mortgage lenders get grumpy and start foreclosing?

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America’s largest loan servicer, Wells Fargo Bank, stopped cash-out refinances a few weeks ago, and it also put the brakes on home equity lines of credit, or HELOC’s, after April 30, said spokesman Tom Goyda.

Chase Bank stopped home equity lending before Wells did. Several lesser-known HELOC lenders have either stopped offering HELOC’s or severely curtailed their offerings.

Mortgage banking trends eventually turn into a herd mentality — especially once the fire sales and foreclosures start. Median home prices will predictably start plunging.

The good news: Some lenders are still offering cash-out refinances and HELOC’s.

U.S. homeowners have $6.2 trillion of tappable equity, according to Black Knight. So, 44.7 million homeowners may be able to cash-out on a first mortgage and/or a HELOC.

But most lenders have added additional charges in the form of points and require higher middle FICO credit scores, tighter income-and-debt-ratios and have curtailed the amount of cash you can pull out when refinancing a loan.

Here are some of the most aggressive options that may still be available when it comes to cashing out:

  1. Conventional, FHA and jumbo (over $765,600) financing allow up to 80% loan-to-value cash-out.
  2. FHA reverse mortgages can provide as much as $401,174 cash-out at age 62 for example or $491,515 at age 80. Non-FHA reverse mortgages can lend up to $4 million.
  3. VA loans allow up to 100% cash-out.
  4. Conventional loans for non-owner-occupied homes offer up to 75% loan-to-value cash-out.
  5. For a HELOC, you can get up to 95% combined loan-to-value.

The final word: If you think you might need the cash, pull it out now. The longer you wait the more you risk a complete shutdown of cash-out loans of any kind as the mortgage credit market continues to deteriorate.

If you are applying for a HELOC, pull the money out and put it into your bank account. Lenders have a history of freezing home equity lines without warning when home values start collapsing.

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Jeff Lazerson - Mortgage Columnist since 2011