Freddie Mac has officially declared that
the refinancing boom is over. The company's
Refinance Report for the second quarter of 2014 said that the longest refinance
boom in the 24 years since it started keeping records officially ended in the
second quarter. That occasion was marked
when the share of mortgages originated for refinancing fell below 50 percent
for the first time since the third quarter of 2008.
Nothaft, Freddie Mac vice president and chief economist, said, "The
housing market realized a significant shift in the second quarter of this year
as refinance activity fell below 50 percent marking the onset of the first
purchase-dominated market the industry has seen since 2000 and an end to the refinance
boom that started in late 2008. In this time we saw fixed mortgage rates hit
all-time lows, with the 30-year fixed-rate mortgage falling well below 4
percent. We also estimate over 25 million American borrowers refinanced their
loans to the tune of over $70 billion in total interest payment savings.
However, since 2008 homeowners cashed-out approximately $215 billion in home
equity, adjusted for inflation."
Borrowers who refinanced during the
quarter reduced their interest payments on average by about one fourth or 1.4
percentage points. On a $200,000 loan, that translates into mortgage
interest savings on average of about
$2,800 during the first 12 months of the loan a net aggregate of more than $1 billion. Savings
were even greater for those who refinanced through
the Home Affordable Refinance Program (HARP). They received an average interest reduction
of 1.6 percentage points or more than $260 in monthly savings.
Refinancers also more frequently chose
products to hasten their principal pay down. Forty percent of those who
refinanced in the second quarter selected shorter term loans. Freddie Mac said that, in light of the wide
spread appreciation in home prices over the last two years, both lower rates
and shorter terms assure that homeowners are building wealth through home
According to the Federal Reserve,
aggregate home equity across the U.S. grew by an estimated $4.1 trillion
between March 31, 2012 and March 31, 2014.
Much of the gain was attributable to rising home prices but Freddie Mac's
economists say that the minimal level of cash-out refinance activity has also contributed
to the rebound in equity.
Shorter term loans also have lower
interest rates than longer term ones.
The difference between 30-year and 15-year fixed-rate loan rates
averaged 0.94 percentage points during the first half of 2014, the largest
semi-annual average difference Freddie Mac has ever recorded. Thus the relatively large number of
refinancers who choose shorter terms has helped lower the total interest paid
on outstanding mortgage debt.
Low mortgage rates, which have
consistently remained below 5 percent for the past four years, means
that relatively few homeowners with newer loans have had much incentive to refinance. Consequently, the median age of the original loan before refinance remained at 7.3 years during the second quarter, the most since Freddie Mac began their analysis in 1985.
Cash-out refinancing increased slightly in
the second quarter. An estimated $7.8
billion in net home equity was cashed out during refinancing of conventional
prime mortgages compared to $5.0 billion in the first quarter. Freddie Mac says this is still modest by
historical standards. The peak in
cash-out refinancing was $84 billion in the second quarter of 2006. From 2010 through 2013 cash-out volumes,
adjusted for inflation, have been the smallest since 1997.
About 79 percent of refinancers
maintained about the same loan balance or lowered their principal balance by
paying in at the closing table. This is
down from 84 percent who took out the same or lower balance loans in the first
quarter and 85 percent a year earlier.
In contrast, 89 percent of those who refinanced in the third quarter of
2006 took cash out at closing.
said, "The low level of cash-out refinance volume in the second quarter,
despite the estimated $2.8 billion increase over last quarter, reflects how
much home equity was lost during the Great Recession. Even with recent home
price gains and rock-bottom interest rates, American households are not cashing
out equity at rates we've seen historically. Regardless of the minimal level of
cash-out refinance activity, when we couple it with lower mortgage rates and
shorter terms homeowners have taken out through refinance over the past couple
years, they have accelerated principal pay down and contributed to the rebound
in home-equity accumulation."
Freddie Mac's economists say that their
analysis shows more borrowers are paying down principal faster than their
amortization schedule calls for, usually by making an extra payment toward
principal whenever possible. Prior to
the Great Recession only about 2 to 10 percent of borrowers made such payments
but since then the number who have paid down additional principal before refinancing
has grown to 16 to 20 percent. This may
reflect a decision by some borrowers to reduce the principal to avoid mortgage
insurance on the new loan.
Loans through HARP made up about 19
percent of the refinances purchased by Freddie Mac and Fannie Mae in the first
five months of 2014. HARP has refinanced
32 million borrowers, most of whom had too little equity to refinance without
the program, since its inception through May 2014. Loans refinanced through the program in the
second quarter had a median age of 7.3 years and 35 percent of HARP borrowers
shorted the term of their loans for which HARP offers an incentive.
through HARP had depreciated a median of 22 percent since the original loan was
closed. For all other refinances during
the second quarter the median property value was up 4 percent over the life of
the old loan. The prior loan had a
median age of 7.4 years and 42 percent of borrowers shortened their loan terms.
refinancing statistics come from a sample of properties on which it has funded
to successive conventional, first-mortgage loans, the latest for
refinancing. The company does not track
the use of funds made available from refinancing and does not track loans paid
off with no new loan placed. Some loan products, such as 1-year ARMs and balloons, are
based on a small number of transactions.