Freddie Mac recently released its quarterly report on cash-out refinancings. During the second quarter, 39% of Freddie Mac-owned loans were refinanced into new mortgages at least 5 percent higher than the original mortgages. This compares with 42% during the first quarter of 2004. The total equity cashed out during the second quarter was $20 billion, said Freddie, down slightly from $23 billion in the first quarter.
The decline is attributed to the increase in mortgage rates which reduced the refinancing share of mortgage applications, stated Freddie Mac Chief Economist Amy Crews Cutts. She said Freddie Mac expects the overall refinancing share to decline further in the second half of the year to between 30% and 35%. "Cash-out refis will make up a larger share of those third- and fourth-quarter refinancings because most homeowners have already refinanced into very low-rate mortgages over the past year," Crews Cutts added.
The survey also reported that during the second quarter, the median ratio of old-to-new interest rate was 1.21. In other words, at least half of those who paid off their original loan and took out a new loan had an interest rate on their old loan that was 21% higher than the rate on their new one, Freddie said.
Freddie Mac said the report also revealed that properties refinanced during the second quarter had a median home price appreciation of 6% over the period since the original loan was made. This was unchanged from the first quarter. The median age of loans refinanced in the second quarter was 1.8
years versus nearly 2.0 years in the first quarter.
Cash-out projections
In a report by UBS, analysts said that refinancings included in the quarter were driven by mortgage rates from February to April 2004 that averaged roughly 5.80%/no-point. On average, this rate was 20 basis points less than the first quarter of 2004, said analysts. It is, therefore, not surprising that the percentage of cash-out refinancings dropped slightly.
Analysts said that driving rates for the third quarter average roughly 6.35%, which is more than 50 basis points above the second quarter. Therefore, researchers anticipate the percentage of cash-outs to increase significantly in the third quarter Freddie Mac report. They project it to well over 50%.
"Although the percentage of refinancers cashing out should rise, the percentage of borrowers cashing out should decline, simply because there should be far fewer refinancers," analysts at UBS said. "Concomitant with this view is our expectation - that discount speeds should slow over the next few months, as cash-outs become less popular."
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