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Cash-Out Refinance Share Rises to 87%
By James Comtois
According to Freddie Mac's quarterly refinance review, 87% of Freddie Mac-owned loans that were refinanced resulted in new mortgages with loan amounts that were at least 5% higher than the original mortgage balances in the third quarter. The revised share for the second quarter was 84%.
According to Frank Nothaft, Freddie Mac vice president and chief economist, in July, 30-year fixed conforming mortgage rates averaged 6.7%, the highest level so far in 2007, before easing in the latter half of the quarter.
He also noted, however, that rates on jumbo mortgages became more expensive compared to conforming rates, rising to an average of 7.4% for 30-year fixed-rate loans in August. These higher rates during the first part of the third quarter put a damper on mortgage activity and reduced the overall volume of refinancing.
"We continue to expect refinancing activity to slow and the borrowers we are likely to see refinance will be those with resetting adjustable-rate mortgages and those who have had their homes long enough that recent house price declines are not a serious threat to equity," said Mr. Nothaft. "For example, in the third quarter of 2007, the median time a borrower had the mortgage that was refinanced was 3.9 years and their median appreciation in home values was 26% over that time."
Freddie Mac expects 30-year fixed mortgage rates to average between 6.3 and 6.7% for conforming loans over the rest of 2007 and initial rates on one-year Treasury-indexed ARMs to hover around 5.5%.
According to Freddie Mac's report, the median ratio of new-to-old interest rate was 1.11 in the third quarter, meaning that half of those borrowers who paid off their original loan and took out a new one increased their mortgage coupon rate by 11%, or roughly five-eighths of a percentage point at the current level of 30-year fixed mortgage rates.
Amy Crews Cutts, Freddie Mac's deputy chief economist, said that the company saw $60.1 billion cashed out in the third quarter, down from a revised $81.4 billion cashed out in the second quarter. "Based on what we've been seeing in the share of mortgage applications for refinance, we are expecting the share of mortgage refinance originations to remain about the same in the fourth quarter as we saw in the third, at about 45%," she said.
"Recent events in financial markets may make it harder for some borrowers to qualify for cash-out refinancing and declining home values will also limit options for some borrowers, however, in the aggregate, homeowners have about $10 trillion in home equity available according to the Federal Reserve Board," Ms. Crews Cutts added.
The Cash-Out Refinance Report also revealed that properties refinanced during the third quarter experienced a median house-price appreciation of 26% during the time since the original loan was made, up from a revised 24% in the second quarter. For loans refinanced in the third quarter, the median age of the original loan was 3.9 years, five months older than the median age of loans refinanced during the second quarter of 2007.
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