In a MarketWatch column last March, I discussed the serious threat that cash-out refinances (cash-out refis) pose for major U.S. housing markets. Eight months later, the problem continues.
To reiterate, in a cash-out refinance mortgage the borrower pulls out some of the equity in the house by taking out a new mortgage larger than the previous one. The homeowner pockets the difference and can use the money in any manner.
During the 2004-07 housing bubble era, homeowners in major metros used their growing equity as a piggy bank to tap at will. According to Freddie Mac’s quarterly refinance report, borrowers pulled out just under $1 trillion from their homes between 2004 and 2007. This total includes only prime first-lien conventional mortgages, and excludes subprime, other non-prime, and second mortgages.