Cash-out refinance activity remained strong in the fourth quarter of 2006 though it was down from 3Q06, according to Freddie Mac.

The agency reported that in the fourth quarter of last year, 84% 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 balances. This compares to 87% in the third quarter.

Freddie Mac's Chief Economist Frank Nothaft attributed the strength to the improvement in mortgage rates during the fourth quarter of last year. He noted that the refinance share of applications was 46% in the fourth quarter, increasing from 41% in the third quarter based on the GSE's primary mortgage market survey data.

The survey also reported the median ratio of new-to-old interest rate was 1.06%. This means that half of the borrowers took out a new loan that had a rate that was 6% higher than the original loan rate. This is an improvement from the third quarter when it was 1.10%.

While the rate is higher, homeowners find it cheaper to consolidate debt and pay off home equity lines of credit that are tied to the much higher prime rate. Freddie Mac said that in the fourth quarter of last year, nearly $71 billion was cashed out, down from $80 billion in the third quarter of 2006.

"With interest rates averaging 6.2%in the fourth quarter for 30-year fixed-rate mortgages, many families found it cost effective to cash-out equity through a new first mortgage even though it raised their rate, "said Amy Crews Cutts, Freddie Mac deputy chief economist. She explained that with the prime rate currently at 8.25%, a home equity loan or line of credit based on that rate might not make sense if a borrower's financing need is significant.

The median age of properties refinanced during the fourth quarter was 3.4-years, which is one month older than those refinanced in the previous quarter. The median appreciation of the refinanced property was 28% in 4Q06, down from 33%.

While cash-out refinance activity is expected to decline over the year, one source of support is anticipated to be ARM refinancings. The agency said there is approximately $500 billion in outstanding ARM loans that will reset this year and many borrowers are expected refinance before this occurs.

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

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