Adjusted Requirements for Cash-out Loans Announced by HUD, FHA, Ginnie Mae

The U.S. Department of Housing and Urban Development (HUD) Thursday announced joint policy actions designed to reduce risk associated with cash-out refinance lending. The changes are intended to preserve homeowners’ ability to convert home equity to cash via a government-sponsored mortgage but also improves the risk profile of HUD’s housing finance programs.

To address these concerns, the Federal Housing Administration (FHA) will lower its maximum loan-to-value (LTV) requirements for cash-out refinance transactions from 85 percent to 80 percent. This policy change outlined in the FHA’s Mortgagee Letter 2019-11 will be effective for loans with case numbers assigned on or after September 1, 2019 and aligns with the maximum cash-out LTV allowed by the Government Sponsored Enterprises (GSEs). 

Meanwhile, the Government National Mortgage Association (Ginnie Mae) announced it is taking further action to manage risks associated with ‘loan churning’ among mortgages insured by the Department of Veterans Affairs (VA). Rapid, serial refinancing has proven to deplete home equity and wealth for veterans with VA-insured mortgages and harmed investor confidence in mortgage-backed securities (MBS) that Ginnie Mae guarantees. 

“We are taking another important step to support sustainable homeownership that builds wealth for families,” said Federal Housing Commissioner Brian Montgomery. “This is a prudent measure to make certain that we protect and preserve the home equity borrowers are building for their futures and guard against taxpayer losses from the FHA program.”

“Today’s announcement underscores Ginnie Mae’s commitment to ensuring the agency’s policies enable homeowners to borrow prudently, utilizing the government-guaranteed mortgage market” said Ginnie Mae Acting President, Maren Kasper, “Additionally, this policy provides global investors with increased certainty in the performance of the Ginnie Mae security, which ultimately lowers mortgage rates for all borrowers served by our program.”