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Blame it on Refis

The American homeowner’s penchant for “using homes as ATMs” in cash-out refinances likely played a big role in sparking the housing crisis about a decade ago, according to a blog posted Thursday by Laurie Goodman, Co-director of the Urban Institute’s Housing Finance Policy Center.

In her post, titled “Using Homes as ATMs, Not Homebuying Fervor, Was More to Blame for the Housing Crisis,” Goodman examines the difference between GSE purchase and refinance loan performance data between 2005 and 2008.

“Many argue that government policies aimed at increasing first-time homebuyers caused the housing crisis,” Goodman wrote. ‘This narrative persists despite considerable evidence to the contrary. Our Housing Credit Availability Index suggests the presence of risky products, not increased lending to riskier borrowers, was a significant contributor to the crisis. New data from the government-sponsored enterprises now suggest a further culprit: mortgage refinance activity.”

According to Goodman’s analysis, 84 percent of refinances during this period were cash-out loans, and they saw sloppy underwriting and higher rates of defaults than purchase loans of the time.

“At the height of the boom, mortgages refinances were more likely to default than mortgages taken out to purchase a home, mostly because many people were treating their homes as ATMs through cash-out refinances,” she wrote.

Looking at data on GSE loans from 1999 to 2015, just 4.48 percent of refinances went more than 180 days delinquent. In 2007, during the crisis, 15.78 percent—or nearly four times more—reach 180 days or more. Only 9 percent of purchase loans were delinquent as long.

“Conventional wisdom suggests that refis should be less risky than purchase loans and default less because the borrowers have a known history of payment,” Goodman wrote. “So these results are surprising, especially given the stronger credit characteristics of refis, such as lower loan-to-value and debt-to-income ratios.”

According to Goodman, “there is a lot of blame to go around for the poor quality of loans before the housing crisis,” but ultimately, she said, the data shows purchase borrowers don’t bear the brunt of it.

See Goodman’s full post at Urban.org.

About Author: Aly J. Yale

Aly J. Yale is a longtime writer and editor from Texas. Her resume boasts positions with The Dallas Morning News, NBC, PBS, and various other regional and national publications. She has also worked with both the Five Star Institute and REO Red Book, as well as various other mortgage industry clients on content strategy, blogging, marketing, and more.
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