Sixty percent of Freddie Mac-owned loans that were refinanced in the third quarter resulted in new mortgages at least 5 percent higher in amount than the original mortgages, according to Freddie Mac’s quarterly refinance review. That’s an increase from the 42 percent of refinanced loans in the second quarter that resulted in cash-outs.

“In the latter half of the second quarter and in the first half of the third quarter, 30-year, fixed mortgage rates were above 6 percent, which led to a big fall-off in refinance applications” said Frank Nothaft, Freddie Mac vice president and chief economist. “The largest decline was in homeowners looking to save money by lowering their mortgage rates, since most mortgages already carry very low rates. However, for cash-out refinancers, these low rates were a very cost-effective way for them to finance a big project such as home improvements or to consolidate and pay-off consumer debt.”

Freddie Mac expects solid growth in U.S. Gross Domestic Product in the final quarter of 2004 of between 3.5 percent and 4 percent and a continuation of the low core rate of inflation (which excludes the direct impacts of the volatile food and energy components) as measured by the Consumer Price Index. The Federal Reserve Board has said it will continue with its “measured” increases in short-term interest rates. “We expect this means another quarter-percentage-point increase in short-term interest rates when the Fed’s Open Market Committee meets on Nov. 10,” Nothaft said.

Freddie Mac expects 30-year fixed mortgage rates will stay low, averaging below 6 percent, through the end of the year and into 2005. Fixed mortgage rates will gradually become more expensive over the course of next year, but should only average about 6.25 percent at the end of 2005. As a result of higher rates, home sales and home construction should come down from the record levels of 2004, but only slightly.

“Higher mortgage rates reduced the refi-share of mortgage applications to 40 percent in the third quarter,” said Amy Crews Cutts, Freddie Mac deputy chief economist. “In recent weeks mortgage rates have come down below 5.7 percent, so we are expecting a pick up in refinance activity in the fourth quarter. However, due to the small share of mortgages outstanding with rates above 6.5 percent, it is unlikely that the refi share will exceed 50 percent or stay there long if it does. Based on our October outlook for mortgage originations and refi activity in 2004, we expect the amount of home equity cashed-out to total $118 billion. Total equity cashed out in the third quarter is estimated at $41 billion, up from the estimated second quarter cash-out amount of $28.5 billion.”

Over the third quarter, homeowners who refinanced their mortgages lowered their rate an average 0.68 percentage points, Cutts said.

The report also revealed that properties refinanced during the third quarter of 2004 experienced a median house-price appreciation of 17 percent during the time since the original loan was made, up considerably from the 7 percent appreciation on loans refinanced in the second quarter. For loans refinanced in the third quarter of 2004, the median age of the original loan was 2.6 years, six months older than the median age of loans refinanced during the second quarter.

These estimates come from a sample of properties on which Freddie Mac has funded at least two successive loans.


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