Urban Institute: Housing Crisis Worsened by Refinance Delinquencies
Blame for the 2008 housing crisis, often pinned on purchase originations by first-time buyers, has been misplaced, reports HousingWire. A new report from the Urban Institute claims mortgage refinances played a larger role in the crisis than previously thought.
Cash-out refinance volume worsened crisis
“At the height of the boom, [mortgage 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,” reports the Urban Institute. The study goes on to say that 84 percent of government-sponsored enterprise (GSE) refinances in 2006 and 2007 were of the cash-out variety.
Such refinanced loans reportedly suffered from less stringent underwriting practices, resulting in higher default rates than those of purchase loans. The article notes that the trend for higher delinquency rates for refinance loans is found during the boom period of 2004 through 2008.
Results contradict conventional wisdom
Delinquency rates for refinance loans began to diverge from that of purchase loans in 2004 by a couple percentage points. Yet by 2007, refinance delinquencies were at nearly 16 percent, compared to around 10 percent for purchase delinquencies. According to the report, delinquency rates for all loan types dropped markedly since 2009.
“Conventional wisdom suggests that refis should be less risky than purchase loans and default less because the borrowers have a known history of payment,” writes the Urban Institute. “So these results are surprising, especially given the stronger credit characteristics of refis, such as lower loan-to-value (LTV) and debt-to-income ratios.”