In spite of declining house prices and tightening credit, Americans are continuing
to pull cash out of their homes according to Freddie Mac's
Cash-Out Refinance Report for the fourth quarter of 2007, but in fewer numbers
and much lower amounts than recorded even one quarter earlier.
81 percent of Freddie Mac-owned loans that were refinanced during that quarter
resulted in new mortgages that were at least 5 percent higher than the mortgages
they replaced. During the third quarter 86 percent of refinances
could be termed "cash-out."
The actual amount of money pulled out of home equity, however, declined more
sharply between the third and fourth quarters. In the former $58.3 billion was
cashed out while in the October-December period in 2007 $37.8 million was pocketed
by homeowners refinancing their homes. This was less than half the amount cashed
out in the fourth quarter of 2006.
The report also revealed that the homes that were refinanced during the fourth
quarter had a median appreciation of 21 percent since the previous mortgage
was signed, down from a revised 25 percent in the third quarter 2007. New loans
were replacing original loans with a median age of 3.8 years, one month older
than the median age of loans refinanced during the second quarter of 2007.
The median ratio of the new-to-old interest rate was 1.04; i.e. one-half of
those new loans were at a first mortgage coupon rate that was 4 percent or less
higher than the old loan which translates into an increase in the coupon rate
of less than an eighth of a percentage point at today's level of 30-year
fixed mortgage rates.
Amy Crews Cutts, Freddie Mac deputy chief economist said, "This is real
evidence of the upset in the mortgage credit markets as well as the
impact of the decline in home values that occurred late in the year. The total
effect on home equity withdrawal is deeper than we document with our Cash-Out
Refinance Report because at the same time that lenders tightened standards on
their prime first mortgages, which is what we have recorded, many of them withdrew
from the home-equity lending market or greatly tightened their criteria for
new home equity loans. The Federal Reserve's Senior Loan Officer Survey
reported that more than 67 percent of large banks tightened lending standards
for revolving home equity loans of credit."
Frank Nothaft, Freddie Mac vice president and chief economist said that "...rates
on jumbo mortgages for prime borrowers became relatively much more expensive
compared to conforming rates, averaging 7.1 percent for 30-year fixed-rate loans
in December, about a full percentage point above rates on a comparable conforming
product. These higher rates on jumbo loans put a damper on refinance activity
and reduced the overall volume of originations.
Nofhaft said that while home owners hold a very large amount of equity in their
homes, this equity cushion is eroding. "According to the Federal Reserve
Board of Governors, total owner's equity in household real estate fell
by $160 billion between the first quarter of 2007 and the third quarter (the
most recent quarter available), to $10.58 trillion. Research conducted by Fed
economists suggests that consumers are more sensitive to changes in their home
equity wealth than to changes in stock market wealth, and thus this decline
in aggregate home equity is likely to have a dampening effect on consumer spending
independent of the volume of equity that homeowners convert into cash."
Data for this report came from a sample of properties on which Freddie Mac has
funded at least two successive loans and are screened to verify that funds are
a refinance rather than for home purchase.