Share Of Cash-out Home Refinancings Decreases In Second Quarter 2004

August 3, 2004

McLean, VA – In the second quarter of 2004, 39 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 first quarter of 2004, when an adjusted 42 percent of refinanced loans had higher new loan amounts. During the second quarter of 2004, the 30-year fixed rate mortgage (FRM) hovered about six percent, bringing about a gradual slowing of refinance activity.

"The very low interest rates that we saw in March, when 30-year fixed rate mortgage rates averaged 5.4 percent, caused an increase in overall refinancing activity for the loans that closed in the second quarter" said Amy Crews Cutts, Freddie Mac deputy chief economist. "When we see regular rate-and-term refinancings increase, the share of cash-out refis drops. Most homeowners are happy to reduce their monthly payments and don't feel a need to withdraw equity, however, lower mortgage rates make home-equity conversion an affordable option for financing other investments such as home improvements or paying for college."

Freddie Mac expects solid growth in U.S. Gross Domestic Product in the second half of 2004 of between 4 and 5 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 indicated a change in monetary policy that includes a gradual "measured" increase in short-term interest rates. This should have little effect on longer term rates, in particular fixed mortgage rates, because those are more sensitive to inflation rather than to Fed policy. Freddie Mac expects 30-year fixed mortgage rates to average between 6 and 6.5 percent in the second half of 2004 and for the housing market to set a new record for home sales and housing starts.

"Higher mortgage rates in the second quarter reduced the refi-share of mortgage applications to 40 percent," stated Cutts. "We expect to see a further reduction in the overall refi share through the second half of 2004 to between 30 and 35 percent. Cash-out refis will make up a larger share of those third and fourth quarter refinancings because most homeowners have already refinanced into very low rate mortgages over the past year. Based on our July outlook for mortgage originations and refi activity in 2004, we expect the amount of home equity cashed-out to total $71 billion. Total equity cashed out in the second quarter was $20 billion, down slightly from the first quarter cash-out amount of $23 billion."

In the second quarter of this year, the median ratio of old-to-new interest rate was 1.21. In other words, at least half of those who paid off their original loan and took out a new one had an interest rate on their old loan that was 21 percent higher than the new interest rate.

"Over the second quarter of 2004, homeowners who refinanced their mortgages lowered their rate on average 0.97 percentage points. On an average loan size of $150,000, that lower rate translates into a payment that is about $94.00 a month lower for a savings of more than $1,100 annually," said Cutts.

The Cash-Out Refinance Report also revealed that properties refinanced during second quarter 2004 experienced a median house-price appreciation of 6 percent during the time since the original loan was made, unchanged from loans refinanced in first quarter. For loans refinanced in the second quarter of 2004, the median age of the original loan was 1.8 years, nearly two months shorter than the median age of loans refinanced during the first 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.

  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
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%
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%
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%
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%
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%
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%
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%
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%
Q1 42% 14% 1.22 2.0 6%
Q2 39% 15% 1.21 1.8 6%


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

2"Lower loan amount" refers to loan amounts that were less than the amortized UPB of the original loan.

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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