A full 89% of Freddie Mac-owned loans that were refinanced resulted in new mortgages with loan amounts that were at least 5% higher than the original loan, according to Freddie Mac's third quarter cash-out refi report. This compares to 88% in the second quarter. Additionally, Freddie noted that this is the highest refinance percentage since the second quarter of 1990.
Freddie Mac Chief Economist Frank Nothaft observed that borrowers continued to refinance their mortgages at a higher frequency than historically given the increase in mortgage rates this year. He attributes this to the high level of ARM originations over the past few years, which are approaching resets. He added that borrowers are also favoring the take-out of equity versus a home equity loan - which tend to have an interest rate tied to prime.
Freddie Mac's survey also reported that the median ratio of new-to-old interest rate was 1.12, meaning that 50% of the borrowers who paid off their original loan took out a new one that had a rate that was 12% higher than the old mortgage rate. Freddie Mac said this was the highest ratio since 1985 when the Agency began tracking this information. In the second quarter, the ratio was 1.08.
The median age of the refinanced loan was 3.4 years compared to 3.2 years in the previous quarter. Meanwhile, the median house-price appreciation for the properties refinanced during the period was 33%, down from 34% in the second quarter.
Amy Crews Cutts, deputy chief economist for Freddie Mac, said that the third quarter saw $82.8 billion cashed-out compared to a revised $90.6 billion in the second quarter. Crews Cutts expects cash-out refinance volume to decline further in the final quarter of 2006 to below $65 billion. The lower volume is expected to come, in part, on more activity from borrowers in taking out home equity lines. "To attract homeowners interested in accessing accumulated home equity but not ready for a refinance of their first-lien mortgage, banks are now starting to offer more creative financing for home-equity lines, with many offering a fixed-rate line of credit option at or below the prime rate," Crews Cutts said.
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