An analysis released this week shows that the share of homeowners pulling cash from a refinance held steady from the prior period. But the report also suggests cashouts will increase this quarter.
In its first quarter Refinance Review, Freddie Mac said that 43% of company-owned refinance loans included cashout -- where the refinanced amount was at least 5% higher than the amortized unpaid principal balance of the original mortgage. The figure is slightly off the fourth quarter's revised figure of 44% and is above the 41% a year earlier.
"With fixed-rate interest rates averaging well below 6 percent during the first quarter, homeowners were using cash out refinancing as an affordable way to restructure their household balance sheets by paying down high-cost consumer debt and making home improvements that add back to the value of their homes," Freddie's chief economist Frank Nothaft said in a statement.
While homeowners are liquidating an important asset by extracting equity, these households are in better financial shape now than they were prior to the recession, the government-sponsored enterprise reported.
As part of its updated review, Freddie included a forecast on the total dollar value of equity extraction that will happen in 2004 based on the estimate of refinance activity in the prime, conventional market. The mortgage giant said that homeowner equity converted into cash in the first quarter is estimated at $23 billion, while for the year its expected to near $114 billion.
The secondary lender indicated that slightly higher rates during the second quarter will foster cashout activity because "the share of cashout refis tends to rise when overall refinancing activity slows down." With fewer borrowers finding it economical to refinance their mortgages for a lower rate, more find the cashout alternative as an affordable option.
Refinance activity has decreased five weeks in a row, and the refinance share of total mortgage applications has dropped to 44%, according to the Mortgage Bankers Association of America's latest survey.
Refinanced properties appreciated 6% in value by the time the refinance loan was made -- down from 12% in the fourth quarter and from 7% in the first quarter 2003, according to the review.
For loans refinanced during the first quarter, the median age of the original loan was just over 2 years, Freddie added.
The estimates reportedly came from a sample of properties on which Freddie funded at least two successive loans. The analysis does not track the use of funds made available from these refinances.