Over 45% of homeowners nationwide who refinanced their mortgages in the fourth quarter of 2010 put cash into their homes to help lower their loan balances, according to Freddie Mac. This marks the highest percentage of cash-in refinances since 1985, and a sharp contrast to the conditions of the Millennium Boom in 2006 when 86% of homeowners cashed-out over $300 billion worth of equity in their homes.

Economists point to the current negative equity crisis to explain the upturn in cash-in deals. Homeowners who owe more than their homes are worth (read: homeowners with a loan-to-value (LTV) ratio exceeding 94%) cannot refinance without bringing cash to the table.

first tuesday take: Scrounging up the last of your savings and pouring it into an underwater home is like scooping water out of a sinking ship with a sand pail. There is simply not enough cash available to most California underwater homeowners, who presently account for nearly a quarter of homeowners in the state, to make a significant dent in their LTV ratios. Their homes will likely not recover from their current state as black-hole assets until well into the 2020s. [For more information regarding cash-in refinancing, see the February 2010 first tuesday article, Homeowners buy-down mortgages with cash-in refinancing and the July 2010 first tuesday article, Owners add cash instead of cashing-out.]

Without a principal reduction, either by the willingness of lenders brought on by the state’s Attorney General or the authority of a judge, California homeowners who agree to cash-in refinances are frequently just throwing more good money after bad – the very definition of sunk costs. This is especially unfortunate for homeowners who can keep their savings and walk away from their underwater mortgage without liability by simply exercising their “put option” to stop making payments and live out the remainder of their ownership until the lender finally forecloses, called the strategic default. [For more information regarding strategic default, see the March 2010 first tuesday article, The underwater homeowner, his future and his agent: a balance sheet reality check – Part I and Part II.]

Re: “Low rates prompting more ‘cash-in’ refinances” from the Washington Post