United Wholesale Mortgage (UWM), the nation's largest mortgage lender, has recently introduced a new high-risk cash-out refinance product called "Cash-Out 90" that has sparked significant discussion in the mortgage industry. Here are the key details and updates:
- The new product allows borrowers to refinance with a loan-to-value (LTV) ratio of up to 89.99%.
- No mortgage insurance (MI) is required, despite the high LTV.
- It's available for primary residences with 30-year fixed-rate terms.
- Borrowers must have a minimum FICO score of 680 and a debt-to-income (DTI) ratio of up to 50%.
- Loan amounts are capped at the conforming loan limit, currently $766,550 for 2024.
Market Context and Implications
This product launch comes at a time of declining interest rates and increasing competition in the mortgage refinance market.
Cash-out refinances have gained popularity due to record-high home equity levels in recent years.
Optimal Blue data for September showed that rate locks for cash-out refis rose by 6% month over month and 55% year over year.
Potential Risks and Concerns
The high LTV ratio raises concerns about increased risk for both lenders and homeowners, especially given current economic uncertainties.
This move by UWM pushes past the typical 80% LTV cap on cash-out loans set by Fannie Mae and Freddie Mac.
Some industry observers draw parallels to the loose lending practices that contributed to the 2008 housing crisis, although current conditions are different.
Pricing and Profitability
Analysts expect UWM to compensate for the increased risk with higher mortgage rates on this product.
Industry professionals estimate that rates for this product are approximately 0.5 to 0.75 points higher than typical 80% LTV rate-and-term refinances.
Despite potentially narrower profit margins, analysts believe UWM has the flexibility to remain profitable while offering this product.
UWM's move is seen as an attempt to attract more borrowers and maintain its position as the top mortgage lender in the country.
The product is being marketed to mortgage brokers as a way to "win more business".
It's unclear whether UWM plans to hold these loans in its portfolio or sell them to private investors.
While the new product offers opportunities for homeowners to access more of their home equity, it also raises questions about risk management in the current economic climate. The industry will be watching closely to see how this product performs and whether other lenders follow suit with similar offerings.
Our Opinion
This is either the smartest or most dangerous play we've seen in mortgage lending this year. UWM's timing is impeccable – catching homeowners when they're equity-rich but cash-tight, and just as rates are becoming digestible again.
However, offering a 90% loan-to-value (LTV) ratio without mortgage insurance (MI) significantly escalates risk. The inclusion of a minimum 680 FICO score offers some security, yet the strategy remains highly precarious. The ultimate success or failure of this initiative will depend on the housing market's performance in the ensuing 24 months.
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