Cash-Out Refinance Share Falls in Fourth Quarter
Dollar Volume of Equity Cashed-Out Drops to $38 Billion: Lowest in 3 1/2 Years
February 08, 2008
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McLean, VA – In the fourth quarter of 2007, 81 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. The revised share for the third quarter of 2007 was 86 percent.
"Home-value declines coupled with tougher underwriting standards at many lenders contributed to a decline in the amount of home equity cashed-out as part of a conventional loan refinance during the fourth quarter," noted Frank Nothaft, Freddie Mac vice president and chief economist. "At the same time, rates on jumbo mortgages for prime borrowers became relatively much more expensive compared to conforming rates, averaging 7.1 percent for 30-year fixed-rate loans in December, about a full percentage point above rates on a comparable conforming product. These higher rates on jumbo loans put a damper on refinance activity and reduced the overall volume of originations.
"Families refinancing in the Midwest were less likely to engage in cash-out activity compared to the rest of the nation, reflecting in part the more modest appreciation rate over the past several years. In the Midwest last year, 76 percent of borrowers who refinancing their prime, conventional mortgage also cashed-out some home equity, compared with 86 percent of borrowers in the Northeast and 87 percent of refinancers in the South and West. Families in the Midwest kept their original loan longer and experienced less appreciation (15 percent over 3.7 years) than borrowers in other areas," observed Nothaft. "In 2008, we expect borrowers who refinance will be those who have had their homes long enough that recent house price declines are not a serious threat to equity." Freddie Mac expects 30-year fixed mortgage rates to average between 5.5 and 6.0 percent for prime, conventional conforming loans over 2008.
In the fourth quarter of 2007, the median ratio of new-to-old interest rate was 1.04. In other words, one-half of those borrowers who paid off their original loan and took out a new one increased their first-mortgage coupon rate by 4 percent or less, which translates into an increase in their coupon rate of less than an eighth of a percentage point at today's level of 30-year fixed mortgage rates.
"This quarter we saw $37.8 billion cashed out, down from a revised $58.3 billion cashed out in the third quarter of 2007. This is more than 50 percent lower than the amount cashed out in the same quarter a year earlier," said Amy Crews Cutts, Freddie Mac deputy chief economist. "This is real evidence of the upset in the mortgage credit markets as well as the impact of the decline in home values that occurred late in the year. The total effect on home equity withdrawal is deeper than we document with our Cash-Out Refinance Report because at the same time that lenders tightened standards on their prime first mortgages, which is what we have recorded, many of them withdrew from the home-equity lending market or greatly tightened their criteria for new home equity loans. The Federal Reserve's Senior Loan Officer Survey reported that more than 67 percent of large banks tightened lending standards for revolving home equity loans of credit.
"While in aggregate, American home owners have a very large equity cushion in their homes, this wealth is eroding. According to the Federal Reserve Board of Governors, total owner's equity in household real estate fell by $160 billion between the first quarter of 2007 and the third quarter (the most recent quarter available), to $10.58 trillion. Research conducted by Fed economists suggests that consumers are more sensitive to changes in their home equity wealth than to changes in stock market wealth, and thus this decline in aggregate home equity is likely to have a dampening effect on consumer spending independent of the volume of equity that homeowners convert into cash."
The Cash-Out Refinance Report also revealed that properties refinanced during the fourth quarter of 2007 experienced a median house-price appreciation of 21 percent during the time since the original loan was made, down from a revised 25 percent in the third quarter 2007. For loans refinanced in the fourth quarter of 2007, the median age of the original loan was 3.8 years, one month older than the median age of loans refinanced during the second 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|
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.
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.