REFINANCE ACTIVITY REMAINS HIGH; CASH-OUT SHARE FALLS IN FOURTH QUARTER

McLean, VA – In the fourth quarter of 2006, 84 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 percentage is down from the third quarter of 2006, when the share of refinanced loans that took cash out was a revised 87 percent.

"The share of mortgages that were for refinance rose in the fourth quarter as 30-year fixed mortgage rates came down to where they started the year," said Frank Nothaft, Freddie Mac vice president and chief economist. "Falling mortgage rates encouraged some people to refinance to lower their payments, for example if they had an adjustable-rate mortgage that was scheduled to reset soon, but the primary driver of refinance continues to be equity extraction.

"The refinance share of applications rose to 46 percent in the fourth quarter of 2006, up from 41 percent in the third quarter, according to Freddie Mac’s Primary Mortgage Market Survey®."

In the fourth quarter of 2006, 30-year fixed mortgage rates averaged 6.2 percent, four-tenths of a percent lower than in the third quarter. Freddie Mac expects 30-fixed mortgage rates to average between 6.3 and 6.5 percent over 2007 and initial rates on 1-year Treasury-indexed ARMs to hover near 5.5 percent.

In the fourth quarter of 2006, the median ratio of new-to-old interest rate was 1.06. In other words, one-half of those borrowers who paid off their original loan and took out a new one increased their mortgage coupon rate by 6 percent, or roughly three-eighths of a percentage point at today’s level of fixed mortgage rates.

"With interest rates averaging 6.2 percent in the fourth quarter for 30-year fixed-rate mortgages, many families found it cost effective to cash-out equity through a new first mortgage even though it raised their rate. With the prime rate at 8.25 percent, a home equity loan or line of credit based on that rate may not make sense if the financing need is large, like a major home improvement or college tuition payments, and will be paid back over several years," said Amy Crews Cutts, Freddie Mac deputy chief economist. "This quarter we saw $70.7 billion cashed out, down from a revised $80.2 billion cashed out in the third quarter of 2006. Cash out refinance volume is expected to decline over 2007, due to lower expected refinance shares overall and lower mortgage origination activity than in 2006.

"While interest rates are expected to be flat or up slightly in 2007, there are roughly $500 billion in outstanding first-lien adjustable-rate mortgages that will see a monthly payment increase due to an interest-rate reset, the start of amortization, or both, in 2007, and a large number of homeowners with second liens that adjust each month depending on changes in the prime rate. We expect that many borrowers facing payment increases this year will refinance prior to their payment adjustment."

The Cash-Out Refinance Report also revealed that properties refinanced during the fourth quarter of 2006 experienced a median house-price appreciation of 28 percent during the time since the original loan was made, down from a revised 33 percent in third quarter 2006. For loans refinanced in the fourth quarter of 2006, the median age of the original loan was 3.4 years, about one month older than the median age of loans refinanced during the third quarter of 2006.

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
199903	68%	11%	0.95	5.4	18%
199904	77%	9%	1.02	4.9	21%
200001	80%	7%	1.07	5.0	22%
200002	80%	8%	1.10	4.8	24%
200003	81%	8%	1.09	4.6	26%
200004	74%	10%	1.02	3.5	23%
200101	53%	8%	0.87	1.6	12%
200102	60%	9%	0.87	2.5	16%
200103	61%	10%	0.88	2.7	18%
200104	47%	19%	0.84	2.8	14%
200201	61%	10%	0.86	3.4	18%
200202	63%	10%	0.88	3.4	20%
200203	44%	19%	0.84	2.9	13%
200204	40%	22%	0.82	2.4	11%
200301	41%	13%	0.81	1.9	7%
200302	33%	15%	0.79	1.7	3%
200303	34%	17%	0.78	1.7	5%
200304	44%	21%	0.82	2.2	12%
200401	42%	14%	0.82	2.0	6%
200402	43%	14%	0.83	2.0	8%
200403	59%	15%	0.88	2.5	17%
200404	57%	19%	0.88	2.2	16%
200501	64%	10%	0.89	2.4	17%
200502	72%	9%	0.92	2.5	23%
200503	73%	10%	0.93	2.6	24%
200504	81%	8%	0.98	2.9	29%
200601	86%	5%	1.02	3.0	31%
200602	88%	5%	1.08	3.2	34%
200603	87%	5%	1.10	3.3	33%
200604	84%	7%	1.06	3.4	28%

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/. For more information, contact us at chief_economist@freddiemac.com

Freddie Mac is a stockholder-owned company established by Congress in 1970 to support homeownership and rental housing. Freddie Mac fulfills its mission by purchasing residential mortgages and mortgage-related securities, which it finances primarily by issuing mortgage-related securities and debt instruments in the capital markets. Over the years, Freddie Mac has made home possible for one in six homebuyers and more than four million renters in America.

###