Although many lenders continue to advocate the apparent benefits of refinancing on a mortgage, Ginnie Mae has come out with advice to the contrary, suggesting that repeated refinances could actually be harmful to many borrowers and investors.
Ginnie Mae, which is a government-backed entity similar to Fannie Mae and Freddie Mac with a focus on guaranteeing government mortgage bonds, says it’s taking steps to clamp down on so-called “churning”, in which lenders push borrowers to refinance over and over again.
The biggest benefit of refinancing is that it enables borrowers to take advantage of lower interest rates and therefore reduce their monthly repayments. But, multiple refinances can also result in more lender fees and an overall higher bill over the lifetime of the mortgage. In addition, churning makes investors uneasy over Ginnie Mae’s outstanding bonds, leading to doubts over whether or not they’ll see a return on their investments.
Ginnie Mae said it started to take action against some lenders last year due to reports that they were pushing borrowers to refinance even when it wouldn’t benefit them. The organization says it’s targeting mortgages where borrowers pull some cash out of the existing equity they’ve amassed on their home during a refinancing. Such loans often amount to more than 90% of the property’s value, and so Ginnie Mae is soliciting feedback from investors to create a new policy protecting against such activity.
“When mortgages are refinanced at a rapid pace, the mortgage securities are paid off more quickly than expected, which means investors don’t receive the yield for as long as they wanted,” The Wall Street Journal reported. “Even a little bit of churning can reduce attractiveness of an entire pool of loans by shortening the life of the bonds.”
Churning may be highest among VA cash-out refinancings, where the loan to value is more than 90%. VA mortgage refinances allow service members to take more cash out than typical loans. In some cases, they may be able to take out up to 100% of the value of the property. In conventional mortgages, cash-out refinances are usually capped at 80% of the property value; Federal Housing Administration loans cap cash-outs at 85%.