Fifty-six percent of Freddie Mac-owned loans that were refinanced in the fourth quarter resulted in new mortgages at least 5 percent higher in amount than the original mortgages, according to Freddie Mac’s quarterly refinance review. This is in contrast to the third quarter of 2004, when 59 percent of refinanced loans had higher new loan amounts.

“The dip in 30-year fixed mortgage rates that happened in the fourth quarter brought down the cash-out share of new refinancings even though the total share of refis went up,” said Frank Nothaft, Freddie Mac vice president and chief economist. “When homeowners decide to refinance because of falling interest rates, they might take cash out of home equity because it is convenient, but it is not the main reason they are seeking a new loan. As interest rates rise over this year we should see higher cash-out shares among refi loans but total dollars cashed-out should be lower than in 2004.”

Freddie Mac expects growth in U.S. Gross Domestic Product in 2005 to reach 3.9 percent, a little stronger than 2004’s growth rate of 3.7 percent, and a continuation of the low core rate of inflation (which excludes the direct impact of the volatile food and energy components) as measured by the Consumer Price Index. The Federal Reserve Board (Fed) has indicated that it views monetary policy as accommodative and this accommodation could be removed at a “measured” pace. “We expect this means another quarter-percentage-point increase in short-term interest rates when the Fed’s Open Market Committee meets on Feb. 1 and 2, and perhaps again when they meet on March 22,” noted Nothaft.

Freddie Mac expects 30-year fixed mortgage rates will begin to rise, but still remain modest, indicating that 2005 will likely be another good year for housing. Thirty-year, fixed mortgage rates will probably rise by about one-half of a percentage point over the year, averaging between 6.1 percent and 6.3 percent in the fourth quarter, up from an average of 5.7 percent over January. Because of these slightly higher rates, home sales and home construction will come down from the record levels of 2004, but only by 1 percent to 3 percent.

“Applications for refinance hit 47 percent in the fourth quarter of 2004,” 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 relatively high refinance activity, around a 45 percent share of new applications, to continue during the first quarter of 2005. 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 January outlook for mortgage originations and refi activity over the next two years, we estimate the amount of home equity cashed-out through prime, first lien refinances to total $96 billion in 2005 and $61 billion in 2006. Total equity cashed out in the fourth quarter is estimated at $41 billion, up from the revised cash-out estimate for the third quarter of $42 billion.”

In the fourth quarter of 2004, the median ratio of old-to-new interest rate was 1.13. In other words, one-half of those borrowers who paid off their original loan and took out a new one had an interest rate on their old loan that was at least 13 percent higher than the new interest rate.

Over the third quarter, homeowners who refinanced their mortgages lowered their rate an average 0.74 percentage points, Cutts said. “On an average loan size of $150,000, that lower rate translates into a payment that is about $74 a month lower for a savings of more than $885 annually,” Cutts said.

The report also revealed that properties refinanced during the fourth quarter of 2004 experienced a median house-price appreciation of 15 percent during the time since the original loan was made, down slightly from the 17 percent appreciation on loans refinanced in the third quarter. For loans refinanced in the fourth quarter of 2004, the median age of the original loan was 2.2 years, four months younger than the median age of loans refinanced during the third quarter.

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


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