Recapitalizing on the Equity

by Tim McLaughlin, Senior VP, Weichert Financial

More American homeowners will be able to tap real estate requity from their hmomes this year, as the percentage eligible for cash out jumped last year by the most in 65 years.

Property owners recaptured $1.6 trillion as home values climbed to the highest levels since 2007. The amount by which the value of the houses exceeds their underlying mortgages rose to $8.2 trillion last year, a gain of 25%, according to Federal Reserve data.

An expanding group of homeowners is able to get cash from their properties as banks show more willingness to do cash out refinances with the market’s recovery. Originations for cash out mortgages are projected to rise 10 percent this year.

At the beginning of the financial crisis in 2008, close to $1 trillion in cash out loans were outstanding at U.S. banks and credit unions, an all time high, according to the Fed. In the housing crash that followed, banks wrote off about 25% of this debt

The year-old real estate recovery is helping to ease defaults. The volume of cash out loans 90 days or more overdue dropped 25% in 4Q12 to $3.2 billion from the prior period, according to the FDIC. As a result, banks are beginning to view cash out lending as a potential source of income, rather than losses, said Stuart Feldstein, president of SMR Research Corp., a consumer-lending research firm.

About $6.5 trillion of residential real estate value evaporated after a wave of mortgage defaults sparked the 2008 financial crisis. The median U.S. home price hit bottom in 2012 after a 33% drop, as measured by the National Association of Realtors. In February, the median price was up 12% from a year earlier, the trade group said last week.

The S&P/Case-Shiller index of property values in 20 cities increased 8.1% in January from the same month in 2012 after rising 6.8% in the year ended in December, the group said. January’s gain was the most since June 2006, and exceeded the 7.9% median forecast by economists in a Bloomberg survey.

“Owners who have been sitting in their homes and watching their equity go up will be more likely to borrow and to spend, and more likely to take risks like looking for another house,” said Craig Focardi, senior research director at CEB TowerGroup.