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Cash-out Refinance Share Rises Dramatically In Third Quarter 2004

November 4, 2004

McLean, VA – In the third quarter of 2004, 60 percent of Freddie Mac-owned loans that were refinanced resulted in new mortgages at least five percent higher in amount than the original mortgages, according to Freddie Mac's quarterly refinance review. This is in contrast to the second quarter of 2004, when 42 percent of refinanced loans had higher new loan amounts.

"In the latter half of the second quarter and in the first half of the third quarter 30-year, fixed mortgage rates were above six percent, which led to a big fall-off in refinance applications" said Frank Nothaft, Freddie Mac vice president and chief economist. "The largest decline was in homeowners looking to save money by lowering their mortgage rates, since most mortgages already carry very low rates. However, for cash-out refinancers these low rates were a very cost effective way for them to finance a big project such as home improvements or to consolidate and pay-off consumer debt."

Freddie Mac expects solid growth in U.S. Gross Domestic Product in the final quarter of 2004 of between 3.5 and four percent and a continuation of the low core rate of inflation (which excludes the direct impacts of the volatile food and energy components) as measured by the Consumer Price Index. The Federal Reserve Board (Fed) has said it will continue with its "measured" increases in short-term interest rates. "We expect this means another quarter-percentage point increase in short-term interest rates when the Fed's Open Market Committee meets on November 10," noted Nothaft.

Freddie Mac expects 30-year fixed mortgage rates will stay low, averaging below six percent, through the end of the year and into 2005. Fixed mortgage rates will gradually become more expensive over the course of next year, but should only average about 6.25 percent at the end of 2005. As a result of higher rates, home sales and home construction should come down from the record levels of 2004, but only slightly.

"Higher mortgage rates reduced the refi-share of mortgage applications to 40 percent in the third quarter," said Amy Crews Cutts, Freddie Mac deputy chief economist. "In recent weeks mortgage rates have come down below 5.7 percent, so we are expecting a pick up in refinance activity in the fourth quarter. However, due to the small share of mortgages outstanding with rates above 6.5 percent, it is unlikely that the refi share will exceed 50 percent or stay there long if it does. Based on our October outlook for mortgage originations and refi activity in 2004, we expect the amount of home equity cashed-out to total $118 billion. Total equity cashed out in the third quarter is estimated at $41 billion, up from the estimated second quarter cash-out amount of $28.5 billion."

In the third quarter of this year, the median ratio of old-to-new interest rate was 1.14. In other words, one-half of those borrowers who paid off their original loan and took out a new one had an interest rate on their old loan that was at least 14 percent higher than the new interest rate.

"In the third quarter of 2004, homeowners who refinanced their mortgages lowered their rate an average of 0.68 percentage points. On an average loan size of $150,000, that lower rate translates into a payment that is about $67 a month lower for a savings of more than $800 annually," said Cutts.

"In aggregate, homeowners that have refinanced their mortgages this year are saving $450 million a month in lower interest costs. These savings offset some of the burdens on families from higher gasoline prices and home heating costs," Cutts added.

The Cash-Out Refinance Report also revealed that properties refinanced during the third quarter of 2004 experienced a median house-price appreciation of 17 percent during the time since the original loan was made, up considerably from the seven percent appreciation on loans refinanced in the second quarter. For loans refinanced in the third quarter of 2004, the median age of the original loan was 2.6 years, six months older than the median age of loans refinanced during the second quarter.

These estimates come from a sample of properties on which Freddie Mac has funded at least two successive loans. Transactions are further screened to ensure that the latest loan is for refinance rather than for home purchase. The Freddie Mac analysis does not track the use of funds made available from these refinances.

Freddie Mac is a stockholder-owned corporation chartered by Congress in 1970 to create a continuous flow of funds to mortgage lenders in support of homeownership and rental housing. Freddie Mac purchases mortgages from lenders and packages them into securities that are sold to investors. Over the years, Freddie Mac has made home possible for one in six homebuyers and more than two million renters across America.

QUARTERLY REFINANCE STATISTICS

 

Percentage of Refinances Resulting in:

   

Quarter

5% Higher Loan Amount1

Lower Loan Amount

Median Ratio of Old to New Rate2

Median Age of Refinanced Loan (years)

Median Appreciation of Refinanced Property

1996  

Q1

48%

12%

1.21

2.7

8%

Q2

67%

10%

1.15

3.7

14%

Q3

74%

9%

1.05

3.9

18%

Q4

63%

13%

1.06

3.6

14%

1997  

Q1

65%

10%

1.06

3.7

14%

Q2

71%

10%

1.00

4.1

17%

Q3

60%

14%

1.07

3.8

14%

Q4

52%

18%

1.10

3.4

13%

1998  

Q1

45%

14%

1.16

3.2

10%

Q2

51%

14%

1.15

4.0

11%

Q3

48%

17%

1.15

4.0

10%

Q4

44%

20%

1.19

3.3

10%

1999  

Q1

54%

13%

1.17

4.3

11%

Q2

56%

13%

1.14

4.7

12%

Q3

68%

11%

1.05

5.4

18%

Q4

77%

9%

0.98

4.9

21%

2000  

Q1

80%

7%

0.94

5.0

22%

Q2

80%

8%

0.91

4.9

24%

Q3

81%

8%

0.92

4.6

26%

Q4

74%

11%

0.98

3.5

23%

2001  

Q1

53%

8%

1.16

1.6

12%

Q2

60%

9%

1.15

2.5

16%

Q3

61%

10%

1.14

2.7

18%

Q4

47%

19%

1.19

2.8

14%

2002  

Q1

61%

10%

1.16

3.4

18%

Q2

63%

10%

1.14

3.4

20%

Q3

44%

19%

1.19

2.9

13%

Q4

40%

22%

1.22

2.4

11%

2003  

Q1

41%

13%

1.23

1.9

7%

Q2

33%

15%

1.27

1.7

3%

Q3

34%

17%

1.28

1.7

5%

Q4

44%

21%

1.22

2.2

12%

2004  

Q1

42%

14%

1.22

2.0

6%

Q2

42%

15%

1.21

2.0

7%

Q3

60%

15%

1.14

2.6

17%



__________________________________

Notes:

1/ Higher loan amount refers to loan amounts that were at least 5 percent greater than the amortized unpaid principal balance (UPB) of the original loan. "Lower loan amount" refers to loan amounts that were less than the amortized UPB of the original loan.

2/ Ratio of old to new rate refers to the ratio of the interest rate of the refinanced loan to the interest rate of the new loan.

Source: Freddie Mac



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