Rising Cash-Out Refinancings: Return of the Housing Bubble or Normalcy?

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If you were in the business of flipping houses or buying a home and using it as a personal piggy bank each time the equity in the home rose, you were familiar with the strategy of cash-out refinancing. While the numbers today are far from alarming compared to the last decade before the boom and bust, Freddie Mac has released its second quarter refinance analysis showing an uptick in the so-called cash-out refinancing levels.

The good news in the report is that borrowers will continue to save over $1 billion in aggregate interest payments over the coming year. Borrowers also continued to shorten their payment terms and build equity in their homes. Some 40% of those who refinanced shortened their loan term. This was roughly the same as the previous quarter, but it was the highest since 1992.

Here is where you might start to get a bubble watch from some market observers — Freddie Mac said:

In the second quarter, an estimated $7.8 billion in net home equity was cashed out during refinances of conventional prime-credit home mortgages compared to the revised first quarter estimate of $5.0 billion. This remains low compared to historical volumes. The peak in cash-out refinance volume was $84 billion during the second quarter of 2006.

Again, this uptick in cash-out refinancing is being represented as far from alarming. Freddie Mac said that this the annual cash-out volumes during 2010 through 2013 have been the smallest since 1997, if you adjusted inflation. The problem is that 2010 was still very tough times, and it wasn’t until 2013 that the housing boom was peaking, and home values have risen since.

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For those who are looking for any evidence of a return of a housing bubble, we would point out that this is far from bubble levels. It may just be a bounce off of a trough. Still, the risk is that all bubbles have to start somewhere — and some may argue that this is just the start of the return to lunacy.

Freddie Mac represented that home equity grew by about $4.1 trillion in aggregate during the two-year period through March 31, 2014. As you would guess, much of that gain was attributable to home value gains. The average rate cut in refinancing was about 1.4 percentage points in the second quarter, so on a $200,000 loan it translates to savings of about $2,800 in interest during the next 12 months. Those who the HARP refinancing option will save an average of $3,200 in total interest payments during the first 12 months.