Cash Out Refinances ... No Longer the 'Cool' Option

Jul. 29, 2010 11:23 AM ET8 Comments
TraderMark profile picture
TraderMark
42.09K Followers

I wonder if this represents a "new attitude" towards debt OR the fact that so many Americans are now underwater they no longer can do cash out refinancing to support their spending habits. Gun to head, I think it's a little of both. Whatever the reason, this is a long term positive but a near term blow to consumerism in Cramerica (70% of the economy) since cash out refinance was a hallmark of the "boom" mid-decade since wages in the private sector are faltering, inflation adjusted.

Then again, 7M households are not even bothering to make payments on their houses at all while living "mortgage free," and so have graduated from old school house ATM spending (2003-2007) to the new and improved paradigm (2009-2014?). [Jun 2, 2010: (Even More) Anecdotal Benefits of Strategic Default]

Via Bloomberg: (my comments in parenthesis)

  • Americans in the second quarter tapped the smallest amount of home equity in a decade, showing households are focused on repairing tattered finances. Owners took out $8.3 billion while refinancing prime home loans as borrowing costs dropped from April through June, down from $8.4 billion in the previous three months and the least in 10 years, according to a report today by McLean, Virginia-based Freddie Mac.
  • Twenty-two percent chose to reduce loan principal, matching the third-highest rate since records began in 1985.
  • Instead of extracting cash to binge on everything from cars to vacations as in previous recoveries, owners are refinancing to improve terms and reduce mortgage payments. The mending of household balance sheets means consumers will be in a better position to join the recovery once employment picks up. (I am waiting with baited breath for this employment pick up)
  • The average rate on a 30-year fixed mortgage fell to a 4.56% in the week ended July 22, the lowest since Freddie Mac, the second-biggest buyer of U.S. mortgages after Fannie Mae, began keeping records in 1971. (just amazing for a 30-year)

This statistic says it all: 88% v 27%... even the Obamas were serial cash out refinancers back in the "day":

  • So-called cash-out loans, in which borrowers increase their loan amounts by at least 5 percent, accounted for 27% of all refinanced loans in the three months to June, capping the lowest three-quarter share on record. Cash-out refinances peaked at 88% in mid 2006.
  • “Five years ago you had people liquidating equity to finance debt-fueled consumption. Now, refinancing gives them breathing room.”

Thankfully the Obamas got some free housing with the husband's new job, an increase in pay, and some pretty sweeet benefits. Most other people who enjoyed "the game" unfortunately, have a different reality today. Hence it is up to the savers of America to bail them out - patriotic duty and all.

  • Acording to Cook County property records, the Obama’s purchased a condo on South East View Park in Chicago in 1999. They took out a 30 year adjustable rate mortgage of $159,250 with an initial rate of 6.6% on April 6, 1999.
  • One month later on May 7, 1999, they took out a line of credit for $20,750.
  • On September 25, 2002, they refinanced their condo with a $210,000 30 year mortgage. This means they took out at least $60,000 of equity from their home.
  • But that was not enough. On May 3, 2004, they took out another line of credit for $100,000 with a variable interest rate.
  • Tax returns for 2004 reveal $14,395 in mortgage deductions. If we assume an effective interest rate of 6%, then they owed about $240,000 on a home they purchased for about $159,250.

All the cool kids were living beyond their means... aka the golden age of Cramerica.

[Jun 15, 2010: Default, not Thrift Pares U.S. Debt]

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TraderMark profile picture
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Mark will be launching a mutual fund summer 2010. He is a self taught private investor who operates the website Fund My Mutual Fund (http://fundmymutualfund.com); a daily mix of market, economic, and stock specific commentary. Fascinated by the market since an early age, he discovered mutual funds as a teenager in the 80s and moved to equities by the mid 90s. The origin of the website is/was to leverage the power of the internet in developing a transparent track record to attract investors for his potential "long/short" mutual fund. His equity focus is identifying secular growth trends and the companies most likely to benefit from these macro trends. Stocks are identified through fundamental analysis, although basic technical analysis is used in determining entry and exit points. You can receive Trader Mark's latest posts daily by subscribing free via RSS reader (http://feeds.feedburner.com/FundMyMutualFund) or subscribing free via email (http://www.feedburner.com/fb/a/emailverifySubmit?feedId=1109639). With a degree in economics from the University of Michigan, a broader understanding of the economy as a whole, along with interpreting investor psychology, is also a major interest for Mark.
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