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Share Of Cash-out Home Refinancings Remains Steady In First Quarter 2004

May 4, 2004

McLean, VA – In the first quarter of 2004, 43 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 fourth quarter of 2003, when a downwardly adjusted 44 percent of refinanced loans had higher new loan amounts. During the second quarter of 2003, when fixed-rate mortgages were still falling, 33 percent of refinanced loans were for cash out and the number of loans being refinanced was considerably higher.

"Mortgage interest rates remained low throughout the first quarter of this year but were higher than we saw last summer," said Frank Nothaft, Freddie Mac chief economist. "With mortgage rates above the 46-year low of last June, the refinance volume is less than last summer's. The share of cash-out refis tends to rise when overall refinancing activity slows down because fewer borrowers find it economical to refinance their mortgages simply for a lower rate but the cash-out alternative may be a very affordable option."

Freddie Mac expects growth in real U.S. Gross Domestic Product (GDP) to be stronger in the second quarter at around 4.7 percent, and for the core inflation rate (excluding the volatile food and energy components) to remain low. Slightly higher mortgage rates in the second quarter will reduce refinance activity, but with 30-year, fixed mortgage rates hovering near the very affordable 6 percent level, the housing market should have a great year, perhaps exceeding 2003's record level of home sales.

"With fixed-rate interest rates averaging well below 6 percent during the first quarter, homeowners were using cash out refinancing as an affordable way to restructure their household balance sheets by paying down high-cost consumer debt and making home improvements that add back to the value of their homes," stated Nothaft. "Even though homeowners are liquidating an important asset by extracting equity these households are in better financial shape now than they were prior to the recession, according to a recent study by economists at the Federal Reserve Bank of New York.

"In the first quarter of this year, the median ratio of old-to-new interest rate was 1.22. 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 22 percent higher than the new interest rate.

"Over the first quarter of 2004, homeowners who refinanced their mortgages lowered their rate on average 1.0 percentage points. On an average loan size of $150,000, that lower rate translates into a payment that is about $100.00 a month lower for a savings of more than $1,200 annually," said Nothaft.

"This quarter's report was changed to include a forecast of the total dollar value of equity extraction that will happen in 2004 based on our estimate of refinance activity in the prime, conventional market," said Nothaft. "Homeowner equity converted into cash in the first quarter is estimated at $23 billion, and total equity extraction for the year is predicted to come in near $114 billion."

The Cash-Out Refinance Report also revealed that properties refinanced during first quarter 2004 experienced a median house-price appreciation of 6 percent during the time since the original loan was made, slightly slower than the 7 percent appreciation rate for loans refinanced in first quarter 2003. For loans refinanced in the first quarter of 2004, the median age of the original loan was just over 2 years.

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 home purchase. The Freddie Mac analysis does not track the use of funds made available from these refinances.

Notes:

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.

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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QUARTERLY REFINANCE STATISTICS

 

Percentage of Refinances Resulting in:

   

Quarter

5% Higher Loan Amount Lower Loan Amount Median Ratio of Old to New Rate 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

43% 13% 1.22 2.1 6%