Home Equity Still Being Pulled Despite Soft Housing Market

Declining home sales and prices have not succeeded in discouraging homeowners from pulling equity out of their homes according to Freddie Mac's quarterly refinance review for the first quarter of 2007.

The corporation reported that 82 percent of Freddie Mac-owned loans that were refinanced during the quarter resulted in new loans that were at least five percent larger than the original amount of the previous mortgage. This is the same percentage of cash-out refinances as was reported in the fourth quarter of 2006.

Because loan volume was down, borrowers actually pulled less money out of their equity than in the last quarter. The total in the first quarter was $70.5 billion compared to 77.0 billion the previous quarter. Amy Crews Cutts, Freddie Mac deputy chief economist said that cash-out refinancing was expected to decline through the remainder of the year due to an expected 6 percent further reduction in overall mortgage activity and a drop in the refinancing share of originations to around 44 percent from the 46 percent that was seen in both the fourth quarter of 2006 and the first quarter of 2007.

The median ratio of new-to-old interest rates was 1.02 which means that half of those borrowers who refinanced with cash out accepted a new loan with a rate that was 2 percent higher than the old loan. With current interest rates for 30-year fixed-rate loans averaging 6.2 percent during the quarter this translated into roughly three-eights of a point increase.

The survey does not track how homeowners planned to use the liberated money; whether they will continue to fuel consumer spending, undertake home improvements or whether they are getting their financial houses in order by paying off equity lines or credit card debt. Freddie Mac vice president and chief economist Frank Nothaft, however, suggested that homeowners are choosing refinancing over home equity lines as a financing mechanism. He said that fixed rate mortgages averaged 6.0 to 6.2 percent (depending on the loan term) during the first quarter and, "Home equity loans are generally indexed to a bank's prime rate, currently averaging 8.25 percent. This interest-rate difference provides a big incentive to borrowers to use cash-out refinance as an alternative to a home equity loans."

Ms. Cutts said that many homeowners who were in a position to do so have refinanced out of prime adjustable rate mortgages (ARMs) that were scheduled for an interest-rate adjustment sometime in 2007. Freddie Mac estimates that in September 2006, there were about $170 billion in prime ARMs outstanding with scheduled rate resets in 2007. As of March 2007, just over $30 billion of these loans remained active.

The report also found that properties refinanced during the first quarter of 2007 had enjoyed a median house-price appreciation of 24 percent during the time since the original loan was made. This was down from a revised 27 percent in the fourth quarter 2006 and 31 percent in the first quarter of 2006. Those loans refinanced during the first quarter had been in place for a median period of 3.3 years.