The Consumer Financial Protection Bureau (CFPB)’s Office of Research published new data detailing the usage of cash-out refinances, a more popular home equity-tapping method relative to reverse mortgages, over 10 years from 2013 to 2023.
The new post specifically examines “the loan and borrower characteristics of homeowners who originated a cash-out refinance compared to a non-cash-out refinance,” it said. “We study refinances originated between 2013 and 2023. This allows us to study delinquencies—one manifestation of risk—throughout the post-crisis period, and how they vary among the population.”
The studied period also notably contains periods of fluctuating interest rates, giving it an added layer of relevance considering today’s rate environment, the CFPB said.
There are six key findings the data led researchers to. One is that cash-out refinances comprised a larger share of total refinance activity specifically in periods of elevated interest rates, as higher borrowing costs led borrowers to explore alternative ways to increase cash flow.
Cash-out refi borrowers also had some shared attributes on average, including lower credit scores, lower incomes and smaller loan amounts when compared to non-cash-out refinance borrowers, the data showed. However, loan-to-value and debt-to-income ratios were similar between both borrower cohorts.
Cash-out refi borrowers were a generally more diverse cohort than their non-cash-out refi counterparts, consisting of higher numbers of older, female, Black and Hispanic borrowers. A fact consistent across both cohorts, however, was that borrowers with higher credit scores had generally lower serious delinquency rates.
This was different from borrowers with lower credit scores.
“For borrowers with lower credit scores, both cash-out and non-cash-out refinance borrowers have similar two-year delinquency rates, except for a relative increase in delinquencies among cash-out refinance borrowers in 2017—a year marked by rising interest rates,” the researchers explained.
Median borrower income for those with a cash-out refinance stood at $84,000 annually, compared with $102,000 for non-cash-out refi borrowers. Additionally relevant to the reverse mortgage industry, borrowers aged 62 and older were more likely to seek out a cash-out refi when compared with a standard refi: 62-plus borrowers made up 21.1% of cash-out borrowers, compared with 15% of non-cash-out borrowers.
Researchers also concluded that beyond “the potential systemic risk of equity extraction contributing to a new financial crisis,” cash-out refis present potential challenges for older homeowners.
“[R]esearch from the JPMorgan Chase Institute showed that a typical cash-out refinance in their data had a longer loan term and larger monthly payment compared to the paid-off mortgage,” researchers said. “This suggests that cash-out borrowers are more likely to still be paying off their mortgage and less likely to own their home free and clear in retirement, potentially exposing these borrowers to more future financial shocks while the mortgage is outstanding.”
