Share of Cash Outs Falling

The third quarter decrease in 5%-or-more refinancing at Freddie is more positive than it appears on its face, said Frank Nothaft, chief economist for the finance giant.

“Though it may look like cash-out refi’s dropped from the second quarter, that is not necessarily so,” he said. “Refinancings made up only about 43% of applications in the second quarter, with 66% of those having first mortgage balances that were at least five percent larger.”

He said 68% of homeowners refinanced their homes during the third quarter, a larger amount than second quarter. So although the share of refinances is only 45%, the market as a whole was much larger.

Customers are using some of the equity taken out of housing and putting it back into purchasing and home improvements and renovations, the review said. Year-to-date, homeowners with conventional, conforming mortgages took about $59 billion in equity out of their homes. At an annualized rate of about $80 billion, this is a slightly slower pace than that set in 2001, when roughly $84 billion was cashed out and turned back into the economy, it said.

“However, total home equity grew by $600 billion in 2001, and by another $300 billion in the first half of 2002, so rising home values are simultaneously increasing the wealth of homeowners even as they turn some of that equity into cash,” Nothaft said. “The average loan-to-value ratio on refinance loans remains close to 70%, showing that the average family maintains a significant quantity of home equity after refinancing.”

The company’s Conventional Mortgage Home Price Index shows the cumulative growth in the value of housing to be about 39% over the past 5 years, on a national average. Freddie Mac’s economists have revised their forecast to an annualized growth rate of about 7% for all of 2002.

The median age of refinanced loans during the third quarter were 3.1 years, according to the review. This compares with 3.9 years last quarter and 3 years during third quarter 2001. Nothaft said the average loan-to-value ratio on refinance loans remains near 70%.

After an extensive assessment by sister company Fannie Mae of the credit risks associated with various types of refinance mortgages, Fannie announced in September that it’s raising its pricing on cash-out refinance loans. It found that a refinance loan where the balance increases in the neighborhood of 20% or more from the prior balance is three times more likely to default than a refinance that increased the balance 3% or less.

Refinancing activity may finally begin tapering off from the frenzy of this year now that mortgage rates appear to be leveling off, said Freddie’s Nothaft.

“As mortgage rates rise to slightly higher levels, we will see fewer refinances, but more of those refinances will be taking cash out, since most homeowners will no longer be able to get a lower mortgage rate by refinancing,” he said. “Therefore, the incentive to refinance becomes that of taking some of the equity out of housing to meet other needs.”

The Mortgage Bankers Association of America’s seasonally adjusted Refinance Index decreased to 4240.4 on Wednesday from 5588.7 the previous week. The record of 6926.9 was announced Oct. 9.