Cash-Out Refinancing at 17-year Low

Freddie Mac said on Tuesday that only 21 percent of homeowners who refinanced during the first quarter took cash out of their homes.  During the quarter 58 percent of homeowners who refinanced took new loans of essentially the same size as their old loans while 21 percent reduced the size of their loans by bringing cash to the table. The share of homeowners who retained about the same loan amount was the highest in the 26 years Freddie Mac has been keeping records.  Cash-out borrowers, those who increased their loan amount by 5 percent or more, had represented as a weighted average about 50 percent of homeowners who refinanced during the 1985 to 2008 period.</p

In the first quarter borrowers cashed out $5.3 billion in home equity through refinancing, the lowest amount since the third quarter of 1995, and consolidated home equity loans and second mortgages worth $5.3 billion for a total increase of $10.7 billion in the value of their loans.   In the fourth quarter the cash-out and consolidation figures were $7.0 billion and 9.0 billion respectively for a total of $16 billion.  During the peak cash-out period in the second quarter of 2006 $83.7 billion was cashed out of American homes.</p

In the introduction of its press release announcing the analysis Freddie Mac said that “homeowners who refinance continue to strengthen their fiscal house.”  Digging down into the figures makes it clear that this is not the result of fiscal discipline.  In the second quarter of 2005 the cash-out refinance rate rose above 80 percent and stayed there until the first quarter of 2008.  During that period the median age of the loans being refinanced ranged from 2.5 to 4.0 years and home equity had increased during the short life of those loans from 23 to 34 percent.  Since the third quarter of 2009, even though the loans had greater age with medians ranging from 3.7 to 5.0 years, the median equity of refinancing borrowers ranged from 0 in that quarter to -9 percent in the quarter just ended.  Americans had little equity against which to take cash out.</p

Homeowners who refinanced a 30-year fixed-rate mortgage had a median interest rate reduction of 1.5 points or savings of about 27 percent, the largest percent reduction in the history of the analysis.  Over the first year of the refinanced loan the median borrower will save about $2,900 in interest payments on a $200,000 loan.  The median age of the loans that were refinanced was 4.3 years.</p

Frank Nothaft, Freddie Mac vice president and chief economist said, “The enhancements to HARP announced in October, such as removing the maximum loan-to-value limit, are beginning to show up in additional refinance volume during the first quarter.  HARP loans were 20 percent of Freddie Mac’s refinance fundings during the first quarter, the highest share since HARP’s inception.”

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