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Cash-Out Refinance Share Falls in First Quarter

Dollar Volume of Equity Cashed-Out Drops to $29 Billion: Lowest in 4 Years

For Immediate Release

May 02, 2008
Contact: corprel@freddiemac.com
or (703) 903-3933

 

McLean, VA – In the first quarter of 2008, 56 percent of Freddie Mac-owned loans that were refinanced resulted in new mortgages with loan amounts that were at least 5 percent higher than the original mortgage balances, according to Freddie Mac's quarterly refinance review. This was the smallest cash-out refinance percentage since the second quarter of 2004. Further, the share for the fourth quarter of 2007 was revised down to 77 percent.

"Over 50 percent of banks tightened their prime mortgage lending standards in the last three months of 2007 according to a survey by the Federal Reserve Board. The tighter lending standards coupled with declining home values across much of the nation has curtailed the amount of home equity cashed out by homeowners," noted Frank Nothaft, Freddie Mac vice president and chief economist."

"While equity conversion is down, regular refinance activity has stepped up. Fixed mortgage rates reached four-year lows and prompted large volumes of refinancing in the first quarter: More than half of borrowers who refinanced into a fixed-rate mortgage lowered their mortgage rate in the first three months of the year," observed Nothaft. "In contrast, six-out-of-seven refinances had a cash-out component during 2006 and 2007, and borrowers were generally increasing their mortgage rates to get a cash-out refinance." Freddie Mac expects 30-year fixed mortgage rates to average between 5.8 and 6.0 percent for prime conventional conforming loans over 2008.

In the first quarter of 2008, the median ratio of new-to-old interest rate was 0.90. In other words, one-half of those borrowers who paid off their original loan and took out a new one decreased their first-mortgage coupon rate by ten percent, which translates into a decrease in their coupon rate of just over five-eighths of a percentage point at today's level of 30-year fixed mortgage rates.

"During the first quarter about $29 billion in home equity was cashed out through refinance of conventional loans made to prime borrowers, off from a downwardly revised $36 billion cashed out in the fourth quarter of 2007. This is about one-third of the amount cashed out in the same quarter a year earlier," said Amy Crews Cutts, Freddie Mac deputy chief economist. "While research has shown a limited effect in the current quarter of equity conversion into cash, the reduced equity extraction we saw in the first quarter will likely be felt in the consumption and investment decisions of households later on.

"The Fed's Flow of Funds report shows that national aggregate homeowners' equity fell just a little over four percent from the first quarter 2007 peak through the end of the year. As a share of the aggregate value of real estate holdings of households, aggregate equity has fallen below fifty percent for the first time in the 56-year history of the Fed's measurement. While in total dollars households still hold a hefty home-equity cushion of over $9.6 trillion, their ability and willingness to tap into it is diminished in the current environment."

The Cash-Out Refinance Report also revealed that properties refinanced during the first quarter of 2008 had a median age of 2.2 years for the original loan, compared to 3.6 years in the fourth quarter of 2007.

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
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%
13%
0.82 2.0 6%
200402
43%
14%
0.83 2.0 8%
200403
60%
15%
0.88 2.5 17%
200404
57%
19%
0.88 2.2 16%
200501
64%
10%
0.89 2.4 18%
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%
4%
1.08 3.2 34%
200603
88%
5%
1.10 3.3 33%
200604
82%
7%
1.04 3.3 27%
200701
83%
5%
1.02 3.4 25%
200702
84%
5%
1.02 3.5 24%
200703
86%
5%
1.10 3.9 25%
200704
77%
8%
1.02 3.6 19%
200801
56%
9%
0.90 2.2 7%

 

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 new to old rate refers to the ratio of the interest rate of the new loan to the interest rate of the refinanced loan.

These data can be found at http://www.freddiemac.com/finance/refi_archives.html. For more information, contact us at chief_economist@freddiemac.com

Freddie Mac is a stockholder-owned corporation established by Congress in 1970 to support homeownership and rental housing. Freddie Mac purchases single-family and multifamily residential mortgages and mortgage-related securities, which it finances primarily by issuing mortgage pass through securities and debt instruments in the capital markets. Over the years, Freddie Mac has made home possible more than 50 million times, ensuring financing for one in six homebuyers and more than four million renters.

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