CASH-OUT REFINANCE SHARE RISES WHILE NUMBER OF REFIS DECLINES IN FIRST QUARTER 2005

McLean, VA – In the first quarter of 2005, 64 percent of Freddie Mac-owned loans that were refinanced resulted in new mortgages with loan amounts that were at least five percent higher than the original mortgage balances, according to Freddie Mac’s quarterly refinance review. This is in contrast to the fourth quarter of 2004, when 56 percent of refinanced loans had higher new loan amounts, and was the highest since the fourth quarter of 2000.

"The first quarter had record home sales and single-family housing starts and a lot of refinancing activity," said Frank Nothaft, Freddie Mac vice president and chief economist. "The share of borrowers who decided to cash-out some home equity as part of their refinance increased too, which helped prop up consumer spending on home improvements even though total consumer expenditures grew more slowly."

Freddie Mac expects U.S. Gross Domestic Product to grow at a slower rate in 2005 than the 3.9 percent growth experienced in 2004. Core inflation (excluding food and energy costs) should continue to be low, but high energy prices are starting to filter into the prices of goods and services and have already depressed consumer spending. "The disappointing economic news over the past few weeks is not likely to cause the Fed to deviate from its measured pace of quarter-point increases in the federal funds rate when it meets today, but it could cause the members of the Federal Open Market Committee to change their stance on future rate increases," noted Nothaft.

Freddie Mac expects 30-year fixed mortgage rates will begin to rise, but still remain modest, indicating that 2005 will likely be another good year for housing. Thirty-year, fixed mortgage rates will probably rise by about one-half of a percentage point over the year, averaging near 6.2 percent to 6.4 percent in the fourth quarter, up from an average of 5.8 percent over the first quarter. Because of these slightly higher mortgage rates, the housing market is expected to cool down from the levels of 2004, even though total home sales and single-family housing starts set new records in the first quarter.

"Applications for refinance hit 45 percent in the first quarter of 2005," said Amy Crews Cutts, Freddie Mac deputy chief economist. "Mortgage rates on 30-year fixed-rate loans dipped below 5.7 percent in the last two weeks of January and remained low throughout February, giving homeowners a strong incentive to refinance their mortgages. The strong cash-out activity was due to both borrowers who were going to do a cash-out refi regardless of interest rate incentives and those who were primarily attracted by the fall in rates but decided to convert some equity into cash while they were at it. Based on our April outlook for mortgage originations and refi activity over the next two years, we estimate the amount of home equity cashed-out through prime, first lien refinances to total $112 billion in 2005 and $69 billion in 2006. Total equity cashed out in the first quarter is estimated at $46 billion, up from the revised cash-out estimate for the fourth quarter of 2004 of $41 billion."

In the first quarter of 2005, the median ratio of old-to-new interest rate was 1.13. 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 13 percent higher than the new interest rate.

"In the first quarter of 2005, homeowners who refinanced their mortgages lowered their rate an average of 0.67 percentage points. On an average loan size of $150,000, that lower rate translates into a payment that is about $66 a month lower for a savings of more than $790 annually," said Cutts.

"In aggregate, homeowners who have refinanced their mortgages in the first quarter will save $100 million per month in lower interest costs. These savings, combined with the home equity cash-outs, are partly responsible for the huge expenditures on home improvements," Cutts added. "According to the Joint Center for Housing Studies at Harvard University, total expenditures on home improvements in the first quarter totaled $130 billion, which in many cases results in increases in home values that exceed the improvement costs."

The Cash-Out Refinance Report also revealed that properties refinanced during the first quarter of 2005 experienced a median house-price appreciation of 16 percent during the time since the original loan was made, up slightly from the 15 percent appreciation on loans refinanced in the fourth quarter 2004. For loans refinanced in the first quarter of 2005, the median age of the original loan was 2.4 years, two months older than the median age of loans refinanced during the fourth 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 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.

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.

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

²Ratio 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.

These data can be found at www.FreddieMac.com/news/finance/refi_archives.htm. For more information, contact us at chief_economist@freddiemac.com.

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