Most refinances closed during the latest quarter included cashout, according to a big buyer of the loans. The high ratio of originations that include equity extraction is expected to continue despite a plunge in the dollar volume.
Freddie Mac announced its fourth quarter refinance review reflected 80 percent of the refinance loans it owns had cashout of at least 5 percent of the original mortgage. The share is above 73 percent in the third quarter and 56 percent in the comparable period a year earlier.
Cashout activity reportedly rose each quarter last year and is at the highest level since the third quarter 2000.
During the last quarter of 2005, the refinance share of mortgage applications was 45 percent, Freddie reported. Today the Mortgage Bankers Association reported the share of refinances at 42%.
A big majority of refinance borrowers extracted home equity rather than trying to reduce their monthly payments because the recent string of rate hikes by the Federal Reserve Board has pushed up home-equity rates, Freddie Chief Economist Frank Nothaft said.
HELs are typically linked to the prime rate, currently at 7.5 percent, while the average for 30-year fixed-rate mortgages is presently near 6.25 percent, Nothaft explained.
"The large share of borrowers who took cash out when refinancing their mortgages combined with the strong overall refinance volume led to an extraction of home equity through prime first-lien refinances of $70.3 billion, slightly higher than the revised estimate of $67.2 billion extracted in the third quarter," said Amy Cutts, Freddie deputy chief economist, in the statement. "We expect the share of all refinance borrowers who take out cash to remain high in 2006 because of the relatively high cost of second mortgages and home-equity lines of credit."
But Freddie estimates 2005 extraction of $243 billion from prime first mortgage lien refinances will likely fall sharply to about $117 billion this year because of expected lower refinance activity -- 37 percent share -- and slower house price appreciation.
Properties experienced a median house-price appreciation of 27 percent during the time since the original loan was made to when it was refinanced in the fourth quarter, compared to 24 percent in the previous three-month period and 15 percent a year earlier.
The median age of loans refinanced in the period was 2.9 years, about three months older than loans refinanced in the third quarter.