Housing Bubble
Fed Bank Lending Survey: Cash-out Refinancing Up
The Federal Reserve Survey on Bank Lending Practices for Q3 was based on results from fifty-five domestic and twenty foreign banks. The survey contained questions to identify the extent of cash-out refinancing during the recent boom in mortgage refinancing activity and the behavior of average home prices over the past twelve months. Banks were also asked for their view on the likely behavior of average home prices during the next twelve months.
There was an increased demand for residential mortgages reported by 40 per cent of domestic banks, up from 27 percent in the previous survey. Tightened lending standards on residential mortgage loans were reported by ten per cent of domestic banks, the highest share in the past decade.
The majority of domestic banks reported that they have not changed their policies for the appraisal of home values for mortgage loans over the last six months, although "four of the five remaining respondents indicated that they had become somewhat more conservative when appraising home values". Not only did 75 per cent of these banks report an increase in average home prices in their respective markets over the last twelve months, but 15 per cent indicated that the increase was substantial. Over the next twelve months many of the banks expected these increases to moderate or partially reverse. None expected any increases to be substantial and only about a third forecast any further increase. About a fifth of banks anticipate a decrease in average home prices.
The survey asked "what percentage of your bank’s customers that refinanced their mortgage also increased the loan principal?" Nearly half of domestic banks indicated that between 20 percent and 40 percent of the customers that refinanced their mortgages over the last six months engaged in such cash-out refinancing. About one-fifth of banks reported that more than 40 percent of these customers did so. The Fed noted that "these percentages are appreciably higher that those reported in the January 2002 survey, which contained a similar question." About 70 percent of banks reported that the typical increase was between 5 percent and 15 per cent of the original outstanding balance, while more than 25 percent indicated that the typical increase was greater than 15 percent. By comparison, in the January 2002 survey only 20 percent of banks indicated that the typical increase in the outstanding balance was greater than 15 percent. The most common use of funds from cash-out refinancing was to repay other debt and to pay for home improvements, "essentially the same as in the January 2002 survey".
October 2002 Senior Loan Officer Opinion Survey on Bank Lending Practices