Dive Brief:
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Owners who refinanced mortgages during the last housing boom were more likely to default than those who took out purchase loans during the period, according to a new report from the Urban Institute. Risky products and cash-out refinances played a more significant role in the subsequent crash than did lending to higher-risk borrowers.
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In 2006 and 2007, 84% of GSE refinances were cash-out refinances, which typically saw more careless underwriting and were more likely to default than purchase loans.
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In 2007, 15.78% of refinances and 9.95% of purchase loans went delinquent for more than 180 days, compared to 4.48% refinances and 3.3% purchase loans between 1999 and 2015. The biggest gap between refinance loans and purchase loans occurred during from 2004 to 2008.
Dive Insight:
Following the Great Recession, lenders have enacted stricter credit standards. However, those standards have slowed the market's recovery, with homeownership rates hovering near a 50-year low, according to The Wall Street Journal. Homeownership among young adults, in particular, remains low in part due to tight credit, a lack of affordable starter-home inventory and a delay in traditional mobility jump-starters, such as having children.
Rising mortgage rates could decrease housing affordability, though their effect has yet to be felt significantly by the market. Rate hikes could encourage lenders to ease borrowing standards by shielding them from the risk linked to aiding even low-risk borrowers who haven't yet been able to acquire a mortgage, CNBC reported in March. Those high interest rates will lower the number of refinance loans and could push lenders to approve more purchase loans to balance the difference, according to CNBC.
Still, looser credit standards alone likely will not be enough to spur an increase in the country’s homeownership rate. Headwinds facing the market including the lot and labor shortage, rising material prices and low levels of for-sale inventory are expected to continue to drive home-price growth.