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Record High Share of Borrowers Who Refinanced in Fourth Quarter Paid Down Principal Balance, Reducing Mortgage Debt

Cash-out Refinancing Share Falls to Lowest Since Analysis Began in 1985

For Immediate Release

January 28, 2010
Contact: corprel@freddiemac.com
or (703) 903-3933


McLean, VA – In the fourth quarter of 2009, 33 percent of borrowers who refinanced their loan lowered their principal balance according to Freddie Mac’s quarterly Refinance Report. This is the highest “cash-in” share since Freddie Mac began tracking the characteristics of refinance transactions in 1985. The next highest share of cash-in refinancing occurred in the fourth quarter of 1993 when 23 percent of borrowers lowered their mortgage debt during refinance.

Consistent with the cash-in share, the report showed that the share of borrowers who increased their loan balance by 5 percent or more during the fourth quarter was at a record low of 27 percent. The previous lowest cash-out refinance share was 33 percent and occurred during the second quarter of 2003.

“Rates on 30-year fixed-rate mortgages set a new record low during the first week in December at 4.71 percent and over the quarter averaged just 4.9 percent in Freddie Mac’s Primary Mortgage Market Survey®,” noted Frank Nothaft, Freddie Mac vice president and chief economist. Freddie Mac’s weekly Primary Mortgage Market Survey® began in 1971. “One-half of borrowers who refinanced their conventional loan during the quarter lowered their annual mortgage interest rate by at least 0.9 percentage points below the old rate. In aggregate, the lower interest rate translates into about $2 billion in payment savings for these homeowners over the first 12 months of the new loan. For families that paid down their mortgage balances when they refinanced, the monthly payment savings are even greater.

“This transformation from a cash-out refi market to a cash-in refi market is consistent with other data we’ve seen on households reducing their overall debt burdens, particularly revolving credit like credit cards. From September of 2008 to November of 2009, consumers cut $100 billion dollars in revolving debt from their obligations, according to the Federal Reserve Board.”

“In the fourth quarter, about $11 billion in home equity was cashed out by homeowners when they refinanced their conventional prime-credit home mortgage, the smallest quarterly amount in nine years. Over 2009, the total amount of equity cashed out was just under $70 billion, the lowest annual total since 2000, when $26 billion was extracted,” said Amy Crews Cutts, Freddie Mac deputy chief economist. “The main causes of the decline in cash-out refinance are declining home prices in many areas of the country that have eliminated equity that could have been extracted and tighter underwriting standards for loan-to-value ratios. Among the refinanced loans in our database, the median appreciation of the collateral property was a negative 2 percent over the median life of the prior loan of 3.6 years.”

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
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
4%
200303
34%
17%
0.78
1.7
5%
200304
44%
21%
0.82
2.2
12%
200401
42%
14%
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%
9%
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
55%
17%
0.92
3.1
7%
200901
43%
13%
0.81
3.1
3%
200902
37%
16%
0.80
3.5
1%
200903
36%
18%
0.83
3.5
0%
200904
27%
33%
0.84
3.6
-2%

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.

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)
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%
$73.9
$11.2
$85.1
200504
25.3%
$79.2
$8.7
$87.8
200601
28.7%
$74.5
$6.1
$80.5
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%
$73.9
$7.8
$81.7
200702
26.2%
$71.9
$7.9
$79.8
200703
27.8%
$51.6
$5.9
$57.4
200704
22.7%
$39.8
$7.0
$46.8
200801
14.6%
$29.2
$7.0
$36.2
200802
18.0%
$32.1
$6.8
$38.9
200803
23.1%
$22.6
$4.0
$26.6
200804
14.0%
$14.7
$4.9
$19.5
200901 (E)
8.5%
$19.7
$8.0
$27.7
200902 (E)
8.0%
$22.0
$9.3
$31.3
200903 (E)
8.4%
$17.3
$7.5
$24.8
200904 (E)
6.3%
$10.6
$7.7
$18.3

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 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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