The nation’s largest mortgage lender, UWM, has launched a new 90% LTV cash-out refi to drum up more business.
While it’s being sold to mortgage broker-partners as a way to “win more business,” it doubles as a worrisome trend of loosening underwriting guidelines.
Typically, homeowners are capped at 80% LTV when it comes to a cash out refinance, but UWM is taking things a little further.
This could be the symptom of low volume, which has plagued many mortgage lenders ever since mortgage rates jumped in mid-2022.
And it could be a sign that some American consumers are struggling to make ends meet as they grapple with surging inflation.
Conventional Cash-Out 90 Lets You Borrow More Than the Other Guys
- Cash out refinance up to 89.99% LTV
- Loan amount capped at the conforming loan limit
- Must be a primary residence
- Minimum FICO score of 680 required
- No mortgage insurance required (might be built into rate)
First let’s talk about this new loan program, known as “Conventional Cash-Out 90,” then we’ll talk about whether it’s worrisome or not.
As noted, United Wholesale Mortgage (UWM) will now let you cash out up to 90% of your property value.
Technically, it’s capped at 89.99% LTV, but it’s still considered a conventional loan. Note that there’s a difference between conventional and conforming loans.
Both are non-government loans, but conforming loans must meet the guidelines of Fannie Mae or Freddie Mac.
And Fannie Mae and Freddie Mac have a maximum 80% loan-to-value ratio (LTV) limit for cash out refinances.
So it doesn’t meet their guidelines, which also means many competing lenders can’t offer such high limits.
In other words, UWM is offering something the other guys can’t, assuming you want a whole lot of cash.
On top of that, they aren’t charging private mortgage insurance (PMI). Though as I always say, if it’s not being charged separately, it’s usually baked into the mortgage rate.
However, the maximum loan amount on the program is at the conforming loan limit, currently $766,550 for 2024.
And the property must be your primary residence (the one you live in), and you need a minimum FICO score of 680 to qualify.
It’s unclear just how high the mortgage rates are, but I can’t imagine them being cheap when your typical vanilla purchase or rate and term refinance at 80% LTV or less is still around 6.5%.
We might be talking about rates in the mid-7% range or higher. But I’m just speculating here. You’ll need to speak to a UWM-approved mortgage broker for actual pricing.
Are We Bringing Too Much Risk Into the Housing Market?
Now let’s talk about risk. As noted, Fannie and Freddie have limited cash out refinances to 80% LTV. And they did this to minimize risk to both lenders and homeowners.
It’s generally not a good thing to be overleveraged as a homeowner, especially if the mortgage debt is pricey as it has become today. And even more so if home prices feel a tad frothy.
This means if your property is valued at $500,000, the largest loan amount you can qualify for when tapping equity is $400,000.
In the early 2000s, prior to the mortgage crisis, it wasn’t uncommon to see 100% LTV cash out refinances. Or even 125% LTV loans!
Of course, we all know how well that went. Homeowners had no equity left, and once home prices collapsed, they were the proud owners of underwater mortgages.
That led to one of the worst housing downturns in our lifetimes. The good news is it also led to stricter underwriting guidelines, including the 80% LTV cap on cash out loans.
So the fact that United Wholesale Mortgage (UWM) is pushing past this limit might feel a little troubling.
But it’s likely just the result of loan volume being so dismal today, and their desire to remain the top mortgage lender in the nation.
You also need homeowners to take the bait. Most have very low locked-in 30-year fixed mortgage rates in the 2-4% range with no desire to disturb them.
Chances are volume won’t be high on this new loan program, despite these more accommodating guidelines.
If and when a lender allows 100% cash out refis again, then I’ll really start to worry. Fortunately that seems unlikely at this juncture.
