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Equity Cash-Out at Eight-Year Low

Fourteen Percent of Refinancing Homeowners Paid Down First Mortgage Debt

For Immediate Release

January 30, 2009
Contact: corprel@freddiemac.com
or (703) 903-3933


McLean, VA – In the fourth quarter of 2008, U.S. homeowners cashed out $17.5 billion in home equity through the refinance of prime first-lien mortgages, the lowest amount since the first quarter of 2001, according to Freddie Mac’s quarterly refinance review. This is down from a revised $28 billion in the third quarter. In addition, 14 percent of refinancing homeowners paid in extra money when they refinanced, reducing their mortgage debt. This is the highest cash-in share since the fourth quarter of 2004 when 19 percent of refinancing homeowners put cash into home equity. Also at a four-year low, the share of refinance loans resulting in new loan amounts that were at least 5 percent higher than the paid-off first-lien mortgage balances fell to 62 percent in the quarter. The third-quarter cash-out share was revised down to 76 percent.

“Mortgage rates for conventional conforming 30-year fixed-rate loans fell to a new record low in the final weeks of the fourth quarter of 2008, giving borrowers an opportunity to save quite a bit on their monthly payment. When interest rates fall sharply we tend to see more borrowers go for a simple rate-and-term refi that lowers their payment or lets them keep their payment about the same but shorten the maturity of their mortgage obligation” noted Frank Nothaft, Freddie Mac vice president and chief economist. “At the same time many borrowers who are attracted by lower mortgage rates take the opportunity to pay in additional money either to remove the need for mortgage insurance or to get to a lower loan-to-value ratio so they can qualify for the best rate.

“Borrowers who have owned their home for many years often have substantial equity in their homes. We found that, on average, borrowers who refinanced were replacing a mortgage that was 3.6 years old and over the time they had that mortgage their home value was up by 9 percent,” observed Nothaft. “In the fourth quarter of 2008, homeowners who refinanced lowered their coupon rate by one-quarter of a percentage point based on the refinance report’s median ratio of new-to-old interest rate.”

“In total, about $115 billion in home equity was cashed out by homeowners in 2008. This is a little less than half the amount that was extracted in 2007,” said Amy Crews Cutts, Freddie Mac deputy chief economist. “Looking at regional trends over the year, the Midwest had the lowest share of refinancings that led to a 5 percent or higher new loan balance, at 53 percent, and homeowners in this region had the highest cash-in share at 12 percent. The South had the highest share of cash-out refinance loans in 2008, at 71 percent, but the median age of the refinanced loan was nearly 4 years old while nationally loans had a median age of just under three years. Moreover, refinancing homeowners in the South had seen home values go up an average of 18 percent over the time since the original loan was taken out versus 11 percent nationally.”

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
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 28%
200701 83% 5% 1.02 3.4 25%
200702 84% 5% 1.02 3.5 24%
200703 86% 5% 1.10 3.9 26%
200704 77% 8% 1.02 3.6 19%
200801 58% 9% 0.91 2.4 8%
200802 67% 9% 0.94 3.3 13%
200803 76% 9% 1.04 4.4 16%
200804 62% 14% 0.96 3.6 9%

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. Refinanced loans with adjustable-rate products are excluded.

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

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. © 2010 by Freddie Mac.

Freddie Mac was established by Congress in 1970 to provide liquidity, stability and affordability to the nation's residential mortgage markets. Freddie Mac supports communities across the nation by providing mortgage capital to lenders. Over the years, Freddie Mac has made home possible for one in six homebuyers and more than five million renters.

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