Cash-Out Refis Dry Up. Lack of Equity and Tight Credit to Blame
Mac reported on Thursday that homeowners continue to hit barriers when looking to refinance their home, although it's not clear whether this is
due to caution or because they have little equity left in their homes to do
otherwise, or simply because they cannot qualify. We'd point toward all of the above as the main hindrances.
During the first quarter of
2011, only 25 percent of those who refinanced existing mortgages pulled cash
out of their home. Even more striking,
21 percent took our smaller loans than the ones they were refinancing. The percentage of homeowners whose loan
balance remained unchanged, 54 percent, was the highest since Freddie Mac began
keeping track of such figures in 1985. Freddie
Mac defines a "cash-out" mortgage as one in which the new principal
balance exceeds the old one by more than 5 percent.
During the quarter an estimated $6 billion in net home equity was
cashed out during the refinance of conventional prime-credit home mortgages
compared to 9.1 billion the previous quarter.
When adjusted for inflation this is the lowest net equity cashed out in
a single quarter since the third quarter of 1996.
average home being refinanced during the quarter depreciated in by 6 percent
since the old loan was put in place which was a median period of five years. In comparison, the Freddie Mac House Price Index shows a 21 percent
decline in its U.S. series between the end of 2005 and the end of 2010. "Thus,
borrowers who refinanced in the first quarter owned homes that had held their
value better than the average home, or may reflect value-enhancing improvements
that owners had made to their homes during the intervening years." Those who refinanced got a median interest
rate reduction for a 30-year fixed-rate mortgage of about 1.2 percentage points
or a savings of about 20 percent in interest costs.
Frank Nothaft, Freddie Mac vice president and chief economist said,
"The average interest rate on single-family mortgages outstanding at the
end of 2010 was about six percent, so there are still plenty of homeowners that
can benefit from refinancing. We found the typical borrower reduced their
interest rate about 1.2 percentage points by refinancing during the first
quarter. For a 30-year fixed-rate mortgage with a $200,000 loan balance, that's
a monthly payment savings of about $150."
Freddie Mac, in its press release compares the 25 percent of cash-out
mortgages in the first quarter to the average cash-out share over the past 25
years of 62 percent and the $6 billion in equity pulled out in the most recent
period with the 83.7 billion cashed out in the second quarter of 2006, the peak
of the refinancing frenzy. It is
illustrative of the sea change in housing finance to look more closely at other
figures from that mid decade period.
14 quarters spanning January of 2005 to June 2008 Americans pulled $887.1
billion in cash out of the equity of their homes, an average of $63.4 billion a
quarter. That didn't include $109.7 in outstanding
home equity lines of credit, equity they had utilized as cash previous to
refinancing, which they consolidated during that period. They did this through refinancing their first
mortgages at levels that averaged an increase of 24.1 percent more than the
balance of the loan they were refinancing.
first 10 quarters after the market started to crash in earnest, total cash-out
dollars as a percentage of aggregate refinanced originations declined steadily,
from 23.4 percent in the third quarter of 2008 to 3.4 percent in the fourth
quarter of 2010. Freddie Mac reports this
figure increased slightly in the first quarter to 4.3 percent.
During all of 2010 a total
of $33.2 billion was cashed out of mortgages.
This is only slightly more than the $31.5 billion that was cashed out in
the second quarter of 2008 alone. And then the music ended.