Contrary to earlier expectations, the share of refinancings in newly originated mortgages continues to increase, Freddie Mac said in its quarterly refinance review. In fact, the share of refinancings in the second quarter actually rose to 60% compared with only 50% in the same period last year. Furthermore, with mortgage rates recently reaching 35-year lows (the firm expects mortgage rates to remain in the 6.5% to 7% for the rest of the year), the refinance share is expected to pick up going forward.
Previously, Freddie Mac expected the refinance share to start falling and eventually reach only about 30% of originations by the end of the year.
The report also noted that cash-out refinancings went up during the second quarter as 67% of Freddie Mac-owned mortgages were refinanced into new loans that were at least 5% greater than their original amount. The percentage of cash-outs was up from 60% in the first quarter.
In the first half of the year, homeowners with conventional, conforming mortgage loans took about $50 billion in equity out of their homes. However, Freddie stated that at an annualized rate of $100 billion, this is somewhat lower than what was seen last year when about $140 billion worth of cash was taken out and turned back to the economy.
Aside from this, Freddie also found that average homeowners were able to refinance and reduce their mortgages by about one percentage point. This would mean decreasing monthly mortgage payments by $90 (which translates to savings of just over $1000 yearly).
However, despite the spike in cash-outs in the second-quarter review, the cash-out share is expected to decline in the next report as mortgage rates remain at very low levels -despite the expected rise in the share of overall refinancings going forward.
Freddie chief economist Frank Nothaft explained that cash-outs usually decline when mortgage rates hit the lows. Borrowers typically just do rate and term refinancing as opposed to a cash-out refinancing during these periods. However, since Freddie Mac's second-quarter report does not reflect activity in the last two months (when rates were at their lowest), the dip in cash-outs was not reflected.
According to the report, rising home values continue to increase the wealth of homeowners - despite their turning their equity into cash. Home equity grew by more than $500 billion in 2001 and was above $80 billion in the first quarter of this year.
This, as well as other indicators, makes economists at the firm optimistic about the housing sector.
"It's an excellent housing market," said Nothaft. "The one thing to remember about the housing (sector) is that it is the most interest rate sensitive sector in the U.S. economy, so whenever mortgage rates are low it's great news for the market."
Nothaft also noted that home sales are going to reach an all-time high as Freddie is predicting that existing and new home sales combined could reach $6.3 million to $6.4 million by the end of 2002.