Freddie Mac reported last week that, in the first quarter of 2007, 82% of Freddie Mac-owned loans that were refinanced resulted in new mortgages with loan amounts at least 5% greater than the original loan amounts. This is unchanged from the fourth quarter of 2007, but down from the third quarter's 87%. Freddie Mac Chief Economist Frank Nothaft attributed the relative strength to the mortgage rate levels that are favorable to home equity loans indexed to prime. At a differential of over 2%, this "difference provides a big incentive to borrowers to use cash-out refinance as an alternative to home equity loans," he said.

The refinance share of applications averaged 46% in Q107, which was also unchanged from Q406, and up from 41% in Q306, reported the GSE.

The survey also noted that the median ratio of new-to-old interest rates was 1.02. This means that half of the borrowers who paid off their original loans took out new ones that increased their mortgage coupon rate by 2% or more. This is an improvement from the fourth quarter's ratio of 1.06.

The dollar volume of equity cashed out totaled $70.5 billion, according to Freddie Mac. This is down from a revised $77.0 billion cashed out in Q406. Cash-out refinance volume is expected to decline over the year as a result of reduced origination activity and a decline in the refinance share of originations.

Freddie Mac Deputy Chief Economist Amy Crews Cutts noted that most borrowers with prime ARMs that were scheduled to reset in 2007 have already done so. In September, the GSE calculated that about $170 billion in prime ARMs outstanding were resetting this year. "As of March 2007, just over $30 billion of these loans remain active," Crews Cutts said.

The GSE's quarterly survey also revealed that properties refinanced in the first quarter had experienced a median home price appreciation of 24% since the time the original loan was made. This is compared with 27% in the fourth quarter and 33% in Q306. For loans refinanced, the median age of the original loan was 3.3 years, unchanged from the fourth quarter and third quarter.

(c) 2007 Asset Securitization Report and SourceMedia, Inc. All Rights Reserved.

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