The 2004-07 bubble era in U.S. housing markets was a time of utter madness.  Much has been written about it, but almost nothing has been said about the craziest aspect of it — the cash-out re-financing lunacy.

Let’s take a good look at it and explore why the scope of this insanity was so massive that it could — once again — start to take down numerous major housing markets within the next year.

Although traditional refinancing had been done by homeowners to lock in lower interest rates for their mortgage, what became known as a cash-out refinancing was different.

With home prices soaring nationwide during the housing bubble, homeowners an opportunity to pull some of that growing equity out of their house.  The main vehicle was a refinance of the homeowner’s first mortgage. The owner cashed out the growing equity in the house by refinancing the first mortgage with a larger first. The difference between the two amounts went directly into the pocket of that homeowner. Just like printing money!

How much extra cash are we talking about?  Freddie Mac publishes a quarterly cash-out refinance report.  Between 2004 and 2007, homeowners were able to cash-out a total of $964 billion.  They were free to spend it on anything, and they did.  Freddie Mac’s figures include only refinancing of prime first-lien conventional mortgages. They do not include refinancing of second liens nor refinancing of subprime loans……more here