In the first quarter of 2006, 88 percent of Freddie Mac-owned loans that were refinanced resulted in new mortgages with loan amounts that were at least 5 percent higher than the original mortgage balances, according to Freddie Mac’s quarterly refinance review.
This percentage is up from the fourth quarter of 2005, when the share of refinanced loans that took cash out was a revised 81 percent, and is the highest since the third quarter of 1990, the mortgage giant said.
“The share of all mortgages that were for refinance fell slightly in the first quarter of 2006 to 44 percent from 45 percent in the fourth quarter of 2005. Over that same period interest rates on all mortgages increased between 0.02 and 0.25 percent,” said Frank Nothaft, Freddie Mac vice president and chief economist.
“Almost no one is refinancing to reduce their interest rate in today’s environment. In fact, the first quarter of 2006 is the first time in 20 quarters in which the new mortgage rate was higher than the old one for more than half of refinancing borrowers,” Nothaft said.
One reason why homeowners may be willing to increase the mortgage rate on their first-lien mortgage is because interest rates on most home equity lines of credit have been pushed up again as the Fed increased short-term interest rates in January and March, which in turn pushed up the prime rate, Nothaft said.
Home-equity loans are typically linked to the prime rate, which currently is at 7.75 percent, and many home equity loans have rates that are 1 percent or more above the prime rate, Nothaft said. In contrast, the average rate on 30-year fixed-rate mortgages is presently near 6.5 percent, Nothaft said.
“Home equity extraction is expected to fall in 2006 from the very high levels we saw in 2005. In 2005, the volume totaled $244 billion. We estimate that $170 billion in home equity will be converted into cash from the refinancing of first-lien, prime, conventional mortgages in 2006,” Nothaft said.
“While more of the borrowers who refinance will be looking to cash-out home equity this year, we expect many fewer refinancings in 2006 and slower home-price appreciation relative to last year,” Nothaft said.
Freddie Mac expects the refinance share of mortgage applications to fall to around 36 percent and home prices to grow at an average rate in the single digits nationally in 2006, slowing from the 13 percent rate seen in 2005, the mortgage giant said.
Freddie Mac expects 30-year fixed mortgage rates to average half a percentage point higher in 2006 relative to 2005, and the average rate on one-year Treasury-indexed adjustable-rate mortgages to rise by one percentage point, the company said.
“Refinancing activity still remains very strong, even with higher interest rates,” said Amy Crews Cutts, Freddie Mac deputy chief economist.
“Total mortgage originations were down in the first quarter by an estimated 24 percent, but the strong overall refinance share along with the very high proportion of borrowers who extracted equity through refinance led to an extraction of home equity through prime first-lien refinances of $59.6 billion in the first quarter,” Cutts said.
“This volume is down only 16 percent from the fourth quarter of 2005’s revised equity extraction volume of $70.9 billion. We expect the share of all refinance borrowers who take out cash to remain high in 2006, but as mortgage rates continue to climb, the refinance share should drop to around 33 percent,” Cutts said.
In the first quarter of 2006, the median ratio of old-to-new interest rate was 0.98, meaning that 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 twopercent lower than the new interest rate, Freddie Mac said.