Limited cashout refinance allows borrowers to attain more favorable mortgage terms, and receive a limited amount of money back at closing.
In a previous post, we mentioned that Fannie Mae has a specific Property Inspection Waiver (PIW) eligibility rule for limited cashout loans, while Freddie Mac makes no such distinction . Compared with regular cashout refis, limited cashout refis have a lower LTV/CLTV requirement for PIW. For example, to be eligible, a limited cashout refi loan can have up to 90% LTV/CLTV comparing to up to 70% for a regular cashout refi loan, if the property is a primary residence or a second home. For investment properties, the LTV/CLTV requirement for a limited cashout refi is less than or equal than 75% while that for a regular cashout refi is 60%.
Using Recursion Cohort Analyzer, we are able to classify PIW eligibility using LTV/CLTV for most loans. Specifically, we are able to identify all PIW eligible loans delivered to Freddie Mac and those loans delivered to Fannie Mae, except those qualified under Fannie Mae’s limited cashout refinance clause. This is because the Fannie Mae loan tape only classifies refis as cashout or noncashout and does not make a distinction for limited cashout.
When the GSEs released Appraisal Waiver information in March 2020, we noticed that about 1.2% of the Fannie Mae loan tape and 0.3% of loans in the CAS reference pool data had PIWs but were classified as “ineligible”. In the meanwhile, 97% of those loans are marked as “Cashout Refinance” loans, which indicates these populations are highly likely to be limited cashout refis.
We further noticed that the limited cashout refinance group performs differently compared to other categories with respect to prepayment and delinquency rates. We will discuss these differences in upcoming posts.