We are pleased to share with you another excellent article/analysis by our friend Keith Jurow. This article discusses the potentially negative ramifications from “cash-out refis”. Here you go:
Nearly all analysts who write about the housing bubble have focused on the purchasing madness that occurred. While this is important, it overlooks the refinancing insanity of 2004-2007. This refinancing lunacy will devastate mortgage and housing markets for years to come.
You may wonder why I choose to focus on bubble era refinancing. After all, refinancing happens all the time.
Here is why: California was the nation’s epicenter for the refinancing madness. During the bubble years, roughly five times as many refinanced first liens were originated there as were purchase loans.
Millions of homeowners refinanced once, twice, even three times or more while their homes soared in value. These became known as “cash-out refis,” where the borrower refinanced for a larger amount than the previous loan. A California home that may have been purchased for $200,000 in 1997 could easily have had a $600,000 refinanced loan in 2006. When home prices began to tumble, they found themselves trapped in a badly underwater property.
There were roughly 20 million homeowners who refinanced during the bubble years.