FHA to Limit Cash-Out Refinances

Noting that FHA endorsements with cash-out refinances have more than tripled since 2013, the Federal Housing Administration today moved to reduce the maximum loan-to-value ratio on a cash-out refi mortgage from 85% to 80%. The agency described the move as a proactive effort to protect the FHA insurance fund should the housing market weaken. The change takes effect Sept. 1.

The agency last reduced the maximum LTV ratio on cash-out refis in 2009 in response to the bursting of the housing bubble. “Prior to FHA’s reduction of LTV requirements and similar changes by other market participants during the market downturn, the share of cash-out refinances had rapidly increased as housing prices increased through the mid-2000s.” the agency said. “Subsequent studies have shown that a significant increase in foreclosures may have been the result of a high number of cash-out refinances completed prior to the collapse of the housing market.”