In mid-2006, cash–out refinancing in the nation reached a peak 88% of all refinance activity according to Freddie Mac’s quarterly refinancing data. The nation’s homeowners who refinanced their mortgage and pulled cash out of their equity increased their debt-load by at least 5%.

This practice of homeowners pulling cash out of their equity while retaining ownership, was cut short in 2007 when home prices dropped significantly and homeowners in California lost most or all of the equity in their homes. The Federal Reserve (the Fed) estimates that between 2005 and the 3rd quarter of 2009, U.S. homeowners lost $7 trillion in equity — a devastating loss of family net worth.

Freddie Mac’s refinancing data for the 4th quarter of 2009 showed a significant drop, with only 27% of U.S. homeowners refinancing their mortgages and cashing out on their equity.

In contrast, 33% of U.S. homeowners who refinanced their mortgages put cash in to reduce the principal balance on their new loan.

This emerging cash–in trend is motivated by homeowners trying to increase the return on their savings (money sitting in their bank account is currently accruing very, very little interest), buying-down their loan-to-value ratio (LTV) and decreasing their monthly interest payments.

first tuesday take: Homeowners in  California will have to pour mountains of unavailable cash into their underwater homes if they decide to keep their current home and make any sort of dent in their loan-to-value ratio (LTV). Few have any savings at all.  Housing prices are nearly half of what they were at their peak in December 2006, and thus half the amount of the loan balance — it will take years before homeowners will be able to begin to build on a positive equity in the homes since first they must get to a 94% LTV to become solvent.

Without a reduction of principal, either voluntarily on the lender’s part or involuntary by means of a judicial cramdown, California homeowners are merely tossing their money at a sinking shelter.

At this point in the 1990 recession, lenders were fully engaged in short sales, with discounts to 94% of the value. This time around the recession cycle, the lenders have found a way to stall discounts and thus the reporting of losses – get congressional and administrative cover for doing nothing.  That will end, and for the lenders it will not be pretty. Hubris blinds its victims from seeing what is coming.

Re: “‘Cash-in’ refis growing in popularity,” from The Los Angeles Times