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One-Third of Refinancing Homeowners Pay Down Debt in Third Quarter

Share of Refinancers Who Take Cash Out At Record Low

For Immediate Release

October 27, 2010
Contact: corprel@freddiemac.com
or (703) 903-3933

 

McLean, VA – Freddie Mac (OTC: FMCC) released the results of its third quarter cash-out refinance analysis.

News Facts

  • In the third quarter of 2010, 33 percent of homeowners who refinanced their first-lien home mortgage lowered their principal balance by paying-in additional money at the closing table. This is the second highest "cash-in" share since Freddie Mac began keeping records on refinancing patterns in 1985. The revised cash-in share in the second quarter was 23 percent.

  • "Cash-out" borrowers, those that increased their loan balance by at least 5 percent, represented 18 percent of all refinance loans; this is the lowest cash-out share since the analysis began in 1985. The higher cash-in share in combination with low cash-out refinancing activity brought the net dollars of home equity converted to cash to the lowest level in 10 years. In the third quarter, an estimated $7.4 billion in net home equity was cashed out during the refinance of conventional prime-credit home mortgages, down from $9.4 billion in the second quarter and less than 10 percent of the peak cash-out volume of $84 billion in the second quarter of 2006.

  • The main causes of the decline in cash-out refinancing were reduced home prices, tighter underwriting standards for loan-to-value ratios, and borrowers’ desire to pay down debt. Among the refinanced loans in Freddie Mac’s analysis, the median appreciation of the collateral property was a negative 3 percent over the median prior loan life of 3.8 years.

  • The median interest rate reduction was about 1 percentage point, or at least 18 percent. Over the first year of the refinance loan life, these borrowers will save over $1,400 in principal and interest payments on a $200,000 loan.


Quotes

Attributed to Frank Nothaft, Freddie Mac vice president and chief economist

  • Interest rates on 30-year fixed-rate mortgages dropped during the third quarter to levels not seen since the early 1950s. Borrowers are responding to the low rates, with over 80 percent of new loan applicants looking for a refinance.

  • "When rates fall to new lows we typically see more ‘rate and term’ refinancers, who are looking only to reduce their interest payments, and relatively fewer cash-out borrowers. But now we’re also seeing a very large share of borrowers reduce their mortgage debt when they refinance. Consumer debt across the board is down since the start of the recession, with non-mortgage consumer debt falling more than 5 percent since 2008, according to the Fed."

Cash-out Refinance Analyses Information

  • These estimates come from a sample of properties on which Freddie Mac has funded two successive conventional, first-mortgage loans, and the latest loan is for refinance rather than for purchase. The 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 No Change in Loan Amount Lower Loan Amount Median Ratio of New to Old Rate2 Median Age of Refinanced Loan (years) Median Appreciation of Refinanced Property
200104 47% 34% 19% 0.84 2.8 14%
200201 61% 29% 10% 0.86 3.4 18%
200202 63% 26% 10% 0.88 3.4 20%
200203 44% 37% 19% 0.84 2.9 13%
200204 40% 38% 22% 0.82 2.4 11%
200301 41% 46% 13% 0.81 1.9 7%
200302 33% 52% 15% 0.79 1.7 4%
200303 34% 49% 17% 0.78 1.7 5%
200304 44% 35% 21% 0.82 2.2 12%
200401 42% 44% 14% 0.82 2.0 6%
200402 43% 43% 14% 0.83 2.0 8%
200403 60% 25% 15% 0.88 2.5 17%
200404 57% 24% 19% 0.88 2.2 16%
200501 64% 26% 10% 0.89 2.4 18%
200502 72% 19% 9% 0.92 2.5 23%
200503 73% 17% 10% 0.93 2.6 24%
200504 81% 11% 8% 0.98 2.9 29%
200601 86% 9% 5% 1.02 3.0 31%
200602 88% 7% 4% 1.08 3.2 34%
200603 88% 7% 5% 1.10 3.3 33%
200604 82% 11% 7% 1.04 3.3 28%
200701 83% 13% 5% 1.02 3.4 25%
200702 84% 11% 5% 1.02 3.5 24%
200703 86% 9% 5% 1.09 3.9 26%
200704 77% 15% 9% 1.02 3.6 19%
200801 58% 33% 9% 0.90 2.4 8%
200802 67% 24% 9% 0.94 3.3 13%
200803 76% 15% 9% 1.04 4.4 16%
200804 55% 28% 17% 0.92 3.1 7%
200901 43% 44% 13% 0.81 3.1 3%
200902 37% 47% 16% 0.80 3.5 1%
200903 36% 46% 18% 0.83 3.5 0%
200904 24% 40% 36% 0.84 3.6 -2%
201001 28% 54% 19% 0.84 4.0 -4%
201002 25% 52% 23% 0.84 4.0 -5%
201003 18% 49% 33% 0.82 3.8 -3%

 

Notes:
1"Higher Loan Amount" refers to loan amounts that were at least 5 percent greater than the amortized unpaid principal balance (UPB) of the original loan. "No Change In Loan Amount" refers to loans on which the principal balance was unchanged during refinance or loans that increased less than 5 percent of the original loan balance due to the inclusion of closing costs for the refinance. "Lower loan amount" refers to loan amounts that were less than the amortized UPB of the original loan. These three columns may not sum to 100% due to rounding.

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.

 

Quarterly Cash-Out Volume For All Prime Conventional Loans
Year 1. Total Cash-Out Dollars as a Percentage of Aggregate Refinanced Originations UPB 2. Total Home Equity Cashed Out ($ billions) 3. Total Volume of 2nd Mortgages/HELOC Consolidation ($ billions) 4. Total Combined Volume of Cash-out and 2nd Mortgages/HELOC Consolidation ($ billions)
200004 11.0% $7.7 $8.4 $16.1
200101 7.8% $12.5 $10.1 $22.6
200102 9.6% $23.0 $15.5 $38.5
200103 10.0% $20.7 $12.7 $33.4
200104 7.2% $26.7 $14.3 $41.0
200201 9.5% $28.7 $18.7 $47.4
200202 10.8% $23.0 $13.0 $36.0
200203 6.7% $25.5 $12.3 $37.9
200204 5.9% $33.9 $15.4 $49.4
200301 6.6% $35.2 $22.6 $57.8
200302 5.9% $38.5 $20.9 $59.4
200303 6.6% $43.3 $22.0 $65.3
200304 10.4% $29.8 $12.9 $42.7
200401 8.7% $26.1 $10.1 $36.2
200402 9.7% $35.6 $12.5 $48.1
200403 16.7% $38.1 $9.3 $47.4
200404 15.1% $43.1 $12.2 $55.3
200501 17.4% $48.1 $9.2 $57.3
200502 20.7% $61.5 $9.6 $71.1
200503 20.6% $74.0 $11.2 $85.2
200504 25.4% $79.3 $8.7 $87.9
200601 28.7% $74.5 $6.1 $80.6
200602 31.0% $83.6 $5.9 $89.5
200603 30.5% $80.7 $6.8 $87.5
200604 25.9% $79.5 $9.6 $89.1
200701 25.7% $73.8 $7.8 $81.7
200702 26.2% $71.9 $7.9 $79.8
200703 27.8% $51.6 $5.9 $57.5
200704 22.7% $39.8 $7.0 $46.8
200801 14.6% $33.1 $8.0 $41.1
200802 18.0% $31.1 $6.5 $37.6
200803 23.1% $18.3 $3.3 $21.6
200804 14.0% $11.9 $4.0 $15.9
200901 8.5% $19.9 $8.1 $28.0
200902 8.0% $23.0 $9.7 $32.7
200903 8.3% $17.5 $7.6 $25.2
200904 5.7% $10.7 $8.6 $19.3
201001 (E) 5.7% $8.1 $4.7 $12.8
201002 (E) 5.5% $9.4 $5.8 $15.2
201003 (E) 3.7% $7.4 $6.7 $14.1

 

Column 1. Indicates the share of newly refinanced mortgage debt balances that are due to equity-extraction through a cash-out refinance. It is the ratio of the value in Column 2 divided by our estimate of the refi dollar volume of prime first-lien mortgage originations.

Column 2. Indicates the dollar volume of equity cashed-out through the refinancing of prime, first-lien conventional mortgages. It is calculated using Freddie Mac's estimate of prime, conventional mortgage originations volume, the refi share of originations, and the values in Column 1 of this sheet. We do not estimate how much equity is taken out through the refinance of FHA or VA loans or through refinance loans originated in the subprime market.

Column 3. Indicates the total increase in the principal balances of refinanced first-lien mortgages due to the consolidation of existing second mortgages or home-equity lines of credit into the first lien, and loan origination costs that are rolled into the principal balances. It is calculated using Freddie Mac's estimate of prime, conventional mortgage originations volume, the refi share of originations, and of the average increase in the principal balance from refinanced loans that were not due to new equity extraction.

Column 4. Indicates the total increase in the principal balances of refinanced first-lien mortgages, inclusive of cash-out amounts, the consolidation of existing second mortgages or Home-Equity lines of credit into the first lien, and loan origination costs that are rolled into the principal balances. It is calculated using Freddie Mac's estimate of prime, conventional mortgage originations volume, the refi share of originations, and of the average increase in the principal balance from refinanced loans.

(E). Indicates the value is an estimate and is subject to revision. The primary sources of any revisions are adjustments to Freddie Mac's estimate of total refinance mortgage originations in the prime, conventional mortgage market.

These data can be found at http://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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