Want to cash in on cash-out re-fis? Hurry

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Want to cash in on cash-out re-fis? Hurry

The continuing low mortgage interest rates are sustaining a boom in the refinance market as we progress into year 2003. A large proportion of today's refinance applications call for an amount of cash to the borrower, over and above refinancing an existing mortgage.

This concerns some major lenders who take a close look at their risk factors. Fannie Mae, the nation's largest buyer of existing mortgages, made an intensive study of cash-out refinance loans a few months ago. They determined that the added risks incurred with cash-out refinance mortgages justify changes in their policies. The newly revised Fannie Mae polices will be affective Feb. 1. This will apply to most refinance mortgages processed by primary lenders nationwide.

"Clearly, refinance mortgages are an important part of the mortgage finance process," it was stated in a Fannie Mae report. "Consumers not only are refinancing more often, but are often electing to cash out some of their equity as well.

"Indeed, the relative share of refinance business that involves cash-out funds has grown, as has the amount of equity that consumers are taking out. Over the years, research indicates that some policy and pricing changes are warranted to assure that we adequately address the risks associated with this type of business."

Therefore, beginning in February Fannie Mae will only accept cash-out mortgage loans that include the following:

- It will only pay off the outstanding principal balance of an existing first mortgage.

- It can also pay off the principal balance of any subordinate mortgage that was used in whole to acquire the property.

- It can finance the closing costs (including prepaid expenses) and provide cash back to the borrower in an amount no more than the lesser of 2 percent of the balance of the new refinance mortgage or ,000.

"These changes align our eligibility requirements more closely with the risk profile of the particular mortgage transaction," the Fannie Mae report noted. "Lenders are cautioned that appraisals in such transactions should be scrutinized with particular care to ensure that the value conclusions are solidly supported by appropriate comparables."

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Q: How will housing activity this year compare with last year?

A: Most segments of the housing industry will probably be moderately lower this year than last, it was predicted by Fitch Ratings, a noted research firm.

The reason cited for the lowering of activity is that Fitch expects the U.S. economy to be somewhat more robust this year than it was in 2002, despite potentially a war during the first quarter. This would likely prompt the Federal Reserve Board to raise short-term interest rates. Fitch anticipates an overall modest increase in long-term interest rates this year. That includes home mortgages. Employment growth, stronger income growth, probably rising consumer confidence and favorable demographics should largely counterbalance the higher mortgage rates.

Weaker economic growth, or even a return to recession this year, would have a somewhat greater negative impact on housing, partially because of the potential for lenders to tighten qualification requirements as mortgage delinquencies and foreclosures increase in numbers.

Fitch does not believe there is a home price bubble. Home prices will likely continue to increase this year, but not as rapidly as they have in recent years. In many cases, prices have advanced very sharply - faster than people's incomes in some markets. In some areas, depending on local economies, home prices could actually back off this year, the report said.

Q: To what extent are more people using the Internet to help them search for a new home?

A: The proportion of prospective home buyers using the Internet to find the right new home is continuing to increase, sharply. In the mid-1990s, about 2 percent of home buyers accessed Web sites to search for homes. Today, over half take that step, according to a report from Borrell Associates Inc., another research group.

The increase is primarily due to the fact that consumers are becoming more comfortable with using the Internet to retrieve needed information. Also, the rapid (almost instantaneous) delivery of the information is a strong incentive, particularly for consumers using fast broad-band connections.

Yet another point is the increasing number of brokers who offer information and photos of their listed properties on the Internet. A few years ago, many brokers were reluctant about putting such information on the Internet for anyone to access. They thought it was part of their professional service to communicate this information personally to buyers.

However, so many home buyers went first to the Internet before even contacting a broker, the professionals decided not to fight but to join the trend. Now, in many cases, it's providing strong benefits for the brokers.

Web sites are now being used as a great marketing tool by brokers. And since prospective buyers do much of their homework online, the broker often spends less personal time with each prospect before closing a home purchase transaction.