It can be financially harmful to borrowers and investors to repeatedly refinance their mortgages, warns Ginnie Mae, a government-backed firm that guarantees government mortgage bonds. That’s why the institution is taking steps to crack down on the practice of “churning,” where lenders push borrowers to refinance their home loans over and over again.
Homeowners may be drawn to the idea of lowering their monthly mortgage payments, but multiple refinances can lead to more lender fees and a higher bill in the end. Churning is also making investors uneasy about Ginnie Mae’s outstanding bonds and causing doubt over whether they’ll get paid for their investments.
Ginnie Mae started to take action against individual lenders last year when their activity suggested they were pushing refis on borrowers, even when they wouldn’t benefit from it. Ginnie Mae is honing in on mortgages where borrowers pull cash out of their home during a refinancing. The loan then results in more than 90% of the value of the property. The firm is soliciting feedback from investors and others about a new policy to protect against it. “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 reports. “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 refis, 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%.
Source: “Ginnie Mae Moves to Crack Down on Repeated Refinancers,” The Wall Street Journal (May 3, 2019) [Log-in required.]