Cash-Out Refinance Share Through Three Quarters of 2008 Lowest in Four Years
Equity Cashed-Out Over Three Quarters Was $99 Billion: One-Half Year-Ago Amount
October 30, 2008
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McLean, VA – In the third quarter of 2008, 78 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 paid-off mortgage balances, according to Freddie Mac's quarterly refinance review. The third-quarter share is down from the 86 percent share of third quarter 2007, but up from an upward-revised second quarter share of 67 percent. Over the first three quarters of 2008, the share of refinances with a cash-out component was 63 percent, the lowest level since 2004.
"Higher mortgage rates during the third quarter reduced the number of borrowers that refinanced solely to obtain a lower interest rate or shorter term. Thus borrowers who did refinance in the third quarter were more likely motivated by a desire to cash-out some of their home equity or move from an ARM to a fixed-rate loan. For most borrowers who refinanced in the third quarter, the refinance loan carried a somewhat higher interest rate than the paid-off loan," noted Frank Nothaft, Freddie Mac vice president and chief economist. "Mortgage rates averaged 6.3 percent for conventional, conforming 30-year fixed-rate mortgages, the highest since the third quarter of 2007.
"The combination of declining home values and tighter underwriting standards have reduced the amount of equity that can be extracted by homeowners this year."
According to the latest Senior Loan Officers Survey conducted by the Federal Reserve Board, 74 percent of banks tightened underwriting standards on prime first-lien mortgages over the three months prior to the July survey.
"Many homeowners who have owned their home for several years still have substantial equity in their home. We found that, on average, borrowers who refinanced were replacing a mortgage that was 4.4 years old and over the time they had that mortgage their home value was up by 17 percent," observed Nothaft.
The median age of loans outstanding that were refinanced – 4.4 years – was the oldest in eight years.
"Nine percent of homeowners reduced their loan amount while refinancing during the first three quarters of this year," said Nothaft. "This is the largest cash-in share in three years – since the first three quarters of 2005.
"In the third quarter of 2008, homeowners who refinanced raised their coupon rate by about three-tenths of a percentage point based on the refinance report's median ratio of new-to-old interest rate."
"During the third quarter about $30 billion in home equity was cashed out through refinance of conventional loans made to prime borrowers, down from $40 billion that was cashed out during the second quarter of this year. In total, about $99 billion in home equity was cashed out through the first three quarters of 2008. This is one-half the amount that was extracted over the first nine months of last year," said Amy Crews Cutts, Freddie Mac deputy chief economist.
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|
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. Refinanced loans with adjustable-rate products are excluded.
Although Freddie Mac attempts to provide reliable, useful information in this document, Freddie Mac does not guarantee that the information is accurate, current or suitable for any particular purpose. The information is therefore provided on an "as is" basis, with no warranties of any kind whatsoever. Opinions and estimates contained in this document are those of Freddie Mac currently and are subject to change without notice. Information from this document may be used with proper attribution. Alteration of this document is strictly prohibited. © 2008 by Freddie Mac.
Freddie Mac is a stockholder-owned corporation established by Congress in 1970 to provide liquidity, stability and affordability to the nation's residential mortgage markets. Freddie Mac raises capital on Wall Street and throughout the world's capital markets to finance mortgages for families across America. Over the years, Freddie Mac has made home possible for one in six homebuyers and more than five million renters.