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Home values are rising and homeowners are taking advantage of that, finally tapping into that equity again in the form of cash-out mortgage refinances. They are doing so, however, by pulling the most conservative amounts in history.
Prior to the historic housing crash of the last decade, homeowners used their homes like ATMs, pulling out as much cash as the bank would allow, which at the time was essentially all of it and more. This led to millions of borrowers falling underwater on their home loans as home prices fell, and leading to 7.1 million homes so far ending up in foreclosure, according to Black Knight Financial Services.
Lending standards have tightened significantly since then, but borrowers are clearly much more risk averse. They are taking cash out again; 42 percent of mortgage refinances last fall involved borrowers taking cash out of their homes, not just lowering their interest rates. That is the highest share since 2008, according to Black Knight.
The average cash-out amount was over $60,000, but the average loan-to-value ratio after the refinance was 67 percent, the lowest level on record. Borrowers left 33 percent equity still in the home.
"All totaled, there was $64 billion in equity tapped via cash-out refinances over the past 12 months, the highest dollar amount for any equivalent 12-month period since 2008-2009," said Ben Graboske, Black Knight senior vice president. "Even so, this amounted to less than 2 percent of available equity being tapped. This is slightly below the post-crisis norm, and 80 percent less than the total amount of equity extracted from the market in 2005-2006."
Consumers are saving more now than they were just a few years ago, when the financial crisis was even closer in the rear-view mirror. The savings rate in December rose to the highest level in three years, according to the Commerce Department. Spending, meanwhile, remained flat.
The average credit score of borrowers doing cash-out refinances is also quite high at 748, suggesting lenders are still highly risk-averse. The fact that the score is so high means that it is the borrower's choice to take a smaller loan, not the lender requirement.
"The people that are transacting have passed the credit screens. Borrowers are taking out what they need. It's the mindset right now. Use what you need and not more," said Graboske. "The only other explanation would be a lender level credit overlay, but these levels would be unprecedented. There is definitely money being left on the table."
The money may be left on the table, or in the house, but that appears to be where the bulk of borrowers today want it. The financial crisis of 2008 may be closing in on a decade ago, but just like the Great Depression it is having a lasting effect on a generation.
"The memories are seared in people's minds who went through it. They're getting more comfortable with a lower debt rate. It's turning into a secular change in behavior in saving for a rainy day," said Peter Boockvar, chief market analyst at the Lindsey Group.
The Federal Reserve may also have a hand in it. It has kept interest rates at zero for so long, which has made it very difficult for consumers to earn money on their savings. Baby boomers are looking at a retirement plan they may no longer be able to meet, while other workers are considering their current financial situations with an abundance of caution.
"When we look at a person's cost of living, it's easy to say low gas prices are good, but one of the major offsets to that has been health care, a tenuous hold on their jobs, and an uncertain outlook after decades of excessive debt growth," said Boockvar.
Borrowers who do take out home equity loans today not only take out just what they need, they also take out fully amortizing home equity loans. That means they start paying it back immediately with monthly principal payments on top of interest. Many banks require this, but some don't. Borrowers are typically using the equity for home repairs, education and medical costs, not for vacations or extravagances as was the case a decade ago. It seems they would rather use their home as a savings account, not a checking account.