CASH-OUT REFINANCE ACTIVITY RISES IN SECOND QUARTER 2005

Lower Than Expected Interest Rates in Quarter Spurred Activity to Higher Levels

McLean, VA – In the second quarter of 2005, 74 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 first quarter of 2005, when 64 percent of refinanced loans had higher new loan amounts, and was the highest since the fourth quarter of 2000.

“Interest rates on 30-year, fixed-rate mortgages dipped lower in the second quarter, spurring refinance activity higher,” said Frank Nothaft, Freddie Mac vice president and chief economist. “Mortgage borrowers took advantage of these low rates by cashing out some home equity before rates go up as they are expected to in coming quarters.”

Freddie Mac expects home sales to hit a new record again in 2005 as low fixed mortgage rates combined with teaser discounts on adjustable-rate mortgages maintain affordability, even as home prices rise. “The Fed’s statements regarding expectations of a continued measured pace of increase in the federal funds rate (a key short-term interest rate), while signaling the Fed’s vigilance on inflation containment, means that rising mortgage rates should start to dampen enthusiasm in the housing market later this year,” noted Nothaft.

Freddie Mac expects 30-year fixed mortgage rates to rise through the end of the year, ending with a fourth quarter average near 6.0 percent, approximately a quarter of a percentage point higher than the second quarter average. Home sales in June set a new monthly record.

“Applications for refinance fell in the second quarter of 2005 to 42 percent, down from the first quarter average of 45 percent,” said Amy Crews Cutts, Freddie Mac deputy chief economist. “The second-quarter cash-out refinance volume reflects, in part, borrowers responding to the fact that they may not be able to obtain such favorable rates in the future to fund home improvements or other big purchases. 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 low rates but decided to convert some equity into cash while they were at it. Based on our July 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 $162 billion in 2005 and about $69 billion in 2006. Total equity cashed out in the second quarter is estimated at $59 billion, up from the revised cash-out estimate for the first quarter of 2005 of $43 billion.”

In the second quarter of 2005, the median ratio of old-to-new interest rate was 1.08. 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 eight percent higher than the new interest rate.

“Also, in the second 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 $64 a month lower for a savings of more than $760 annually,” said Cutts.

“By our estimates, homeowners extracted $140 billion in home equity through first lien refinances in 2004,” Cutts added. “Harvard’s Joint Center for Housing Studies reports that homeowners spent more than $140 billion last year on home improvements and remodeling, which often translate into gains in home values that exceed the cost of the improvement. Based on the Joint Center’s Remodeling Activity Indicator, the pace of home improvement expenditures remains strong, increasing 4.5 percent in the second quarter.”

The Cash-Out Refinance Report also revealed that properties refinanced during the second quarter of 2005 experienced a median house-price appreciation of 23 percent during the time since the original loan was made, up from the 17 percent appreciation on loans refinanced in the first quarter 2005. For loans refinanced in the second quarter of 2005, the median age of the original loan was 2.6 years, two months older 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 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 3.6 million renters across America.

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