Home equity accessed through conforming first lien refinances fell in the fourth quarter and is expected to keep falling through the end of next year. The outlook changes, however, when second lien activity is factored in.
In its fourth quarter Refinance Review, Freddie Mac found that 56% of its loans that were refinanced included cashout -- where the new mortgage resulted at least 5% higher in amount than the original loan. The figure slipped from a revised 59% in the third quarter, but stands well above the 44% in the fourth quarter 2003.
"The dip in 30-year fixed mortgage rates that happened in the fourth quarter brought down the cashout share of new refinancings even though the total share of refis went up," said Freddie chief economist Frank Nothaft in a written statement. "When homeowners decide to refinance because of falling interest rates, they might take cash out of home equity because it is convenient, but it is not the main reason they are seeking a new loan. As interest rates rise over this year we should see higher cashout shares among refi loans but total dollars cashed-out should be lower than in 2004."
Freddie said falling rates in recent weeks will bring in relatively high refinance activity -- around a 45% share of new applications in the first quarter. But, because only small share of mortgages outstanding have rates above 6.5%, it is unlikely that the refi share will exceed half or maintain that level for long if it does.
The 30-year average, which was 5.7% in January, is expected to end the year between 6.1% and 6.3%, according to Freddie. Nothaft recently said in a conference call that he anticipates refinance loans will comprise 39% of total originations this year and that 75% to 80% of those refinances will include a cashout component, which is about three times higher than in recent years.
Estimated total home equity cashed out in the fourth quarter of $41 billion reportedly dropped from prior quarter's revised cashout estimate of $42 billion. In 2004, the estimated total was about $135 billion, according to Freddie.
Freddie estimates the amount of home equity cashed-out through prime, first lien refinances will drop to $96 billion this year and lower to $61 billion in 2006.
Freddie's findings contrast reports of strong home equity lending at many major mortgage players.
Wells Fargo said healthy demand in its home equity products ranked it No. 1 in home equity loan market share for the fourth year in a row. At ABN AMRO Mortgage Group, November volume reversed a descending trend due in part because it "is experiencing increased consumer interest in...home equity and second mortgage products." For Chase Home Finance, home equity loan volume almost doubled over the past year.
Much of the disparity between Freddie's numbers and the strong numbers being reported by mortgage bankers lies in the lien position; while Freddie is reporting first mortgage cashouts, much of today's home equity production is being generated through second liens.
Nothaft expects home equity lending to remain a strong component of the market, but dampen as the year progresses with rising rates.
The value of refinanced properties appreciated 15% by the time the loan was made, down slightly from 17% in the third quarter, but higher than 12% a year earlier, according to the review.
The median age of loans refinanced in the fourth quarter was reported at 2.2 years, four months younger than in the prior quarter.
The estimates were based on a sample of properties on which Freddie has funded at least two successive loans.