Cash-out Refinance Share Falls In First Quarter
|May 5, 2008|
McLean, VA – In the first quarter of 2008, 56 percent of Freddie Mac-owned loans that were refinanced resulted in new mortgages with loan amounts that were at least 5 percent higher than the original mortgage balances, according to Freddie Mac's quarterly refinance review. This was the smallest cash-out refinance percentage since the second quarter of 2004. Further, the share for the fourth quarter of 2007 was revised down to 77 percent.
"A tightening of mortgage underwriting standards throughout the lending industry coupled with declining home values across much of the nation has curtailed the amount of home equity cashed out by homeowners," noted Frank Nothaft, Freddie Mac vice president and chief economist.
"While equity conversion is down, regular refinance activity has stepped up. Fixed mortgage rates reached four-year lows and prompted large volumes of refinancing in the first quarter: More than half of borrowers who refinanced into a fixed-rate mortgage lowered their mortgage rate in the first three months of the year," observed Nothaft. "In contrast, six-out-of-seven refinances had a cash-out component during 2006 and 2007, and borrowers were generally increasing their mortgage rates to get a cash-out refinance." Freddie Mac expects 30-year fixed mortgage rates to average between 5.8 percent and 6.0 percent for prime conventional conforming loans over 2008. In the first quarter of 2008, the median ratio of new-to-old interest rate was 0.90. In other words, one-half of those borrowers who paid off their original loan and took out a new one decreased their first-mortgage coupon rate by 10 percent, which translates into a decrease in their coupon rate of just over five-eighths of a percentage point at today's level of 30-year fixed mortgage rates.
"During the first quarter about $29 billion in home equity was cashed out through refinance of conventional loans made to prime borrowers, off from a downwardly revised $36 billion cashed out in the fourth quarter of 2007. This is about one-third of the amount cashed out in the same quarter a year earlier," said Amy Crews Cutts, Freddie Mac deputy chief economist. "While research has shown a limited effect in the current quarter of equity conversion into cash, the reduced equity extraction we saw in the first quarter will likely be felt in the consumption and investment decisions of households later on.
"The Fed's Flow of Funds report shows that national aggregate homeowners' equity fell just a little over 4 percent from the first quarter 2007 peak through the end of the year. As a share of the aggregate value of real estate holdings of households, aggregate equity has fallen below 50 percent for the first time in the 56-year history of the Fed's measurement. While in total dollars households still hold a hefty home-equity cushion of over $9.6 trillion, their ability and willingness to tap into it is diminished in the current environment."
The Cash-Out Refinance Report also revealed that properties refinanced during the first quarter of 2008 had a median age of 2.2 years for the original loan, compared to 3.6 years in the fourth quarter of 2007.
These estimates come from a sample of properties on which Freddie Mac has funded at least two successive loans. Transactions are further screened to verify 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.
Quarterly Refinance Statistics
Percentage of Refinances Resulting in:
Descriptive Statistics on Loan Terms and Property Valuation
|Quarter||5% Higher Loan Amount1||Lower Loan Amount||Median Ratio of New to Old Rate2||Median Age of Refinanced Loan (years)||Median Appreciation of Refinanced Property|
Source: Freddie Mac