Cash-Out Refis Dry Up. Lack of Equity and Tight Credit to Blame

Freddie Mac reported on Thursday that homeowners continue to hit barriers when looking to refinance their home, although it's not clear whether this is due to caution or because they have little equity left in their homes to do otherwise, or simply because they cannot qualify. We'd point toward all of the above as the main hindrances.

During the first quarter of 2011, only 25 percent of those who refinanced existing mortgages pulled cash out of their home.  Even more striking, 21 percent took our smaller loans than the ones they were refinancing.  The percentage of homeowners whose loan balance remained unchanged, 54 percent, was the highest since Freddie Mac began keeping track of such figures in 1985.  Freddie Mac defines a "cash-out" mortgage as one in which the new principal balance exceeds the old one by more than 5 percent.

During the quarter an estimated $6 billion in net home equity was cashed out during the refinance of conventional prime-credit home mortgages compared to 9.1 billion the previous quarter.  When adjusted for inflation this is the lowest net equity cashed out in a single quarter since the third quarter of 1996. 

The average home being refinanced during the quarter depreciated in by 6 percent since the old loan was put in place which was a median period of five years.  In comparison, the Freddie Mac House Price Index shows a 21 percent decline in its U.S. series between the end of 2005 and the end of 2010. "Thus, borrowers who refinanced in the first quarter owned homes that had held their value better than the average home, or may reflect value-enhancing improvements that owners had made to their homes during the intervening years."  Those who refinanced got a median interest rate reduction for a 30-year fixed-rate mortgage of about 1.2 percentage points or a savings of about 20 percent in interest costs.

Frank Nothaft, Freddie Mac vice president and chief economist said, "The average interest rate on single-family mortgages outstanding at the end of 2010 was about six percent, so there are still plenty of homeowners that can benefit from refinancing. We found the typical borrower reduced their interest rate about 1.2 percentage points by refinancing during the first quarter. For a 30-year fixed-rate mortgage with a $200,000 loan balance, that's a monthly payment savings of about $150."

Freddie Mac, in its press release compares the 25 percent of cash-out mortgages in the first quarter to the average cash-out share over the past 25 years of 62 percent and the $6 billion in equity pulled out in the most recent period with the 83.7 billion cashed out in the second quarter of 2006, the peak of the refinancing frenzy.  It is illustrative of the sea change in housing finance to look more closely at other figures from that mid decade period.

During 14 quarters spanning January of 2005 to June 2008 Americans pulled $887.1 billion in cash out of the equity of their homes, an average of $63.4 billion a quarter.  That didn't include $109.7 in outstanding home equity lines of credit, equity they had utilized as cash previous to refinancing, which they consolidated during that period.  They did this through refinancing their first mortgages at levels that averaged an increase of 24.1 percent more than the balance of the loan they were refinancing.

In the first 10 quarters after the market started to crash in earnest, total cash-out dollars as a percentage of aggregate refinanced originations declined steadily, from 23.4 percent in the third quarter of 2008 to 3.4 percent in the fourth quarter of 2010.  Freddie Mac reports this figure increased slightly in the first quarter to 4.3 percent.  

During all of 2010 a total of $33.2 billion was cashed out of mortgages.  This is only slightly more than the $31.5 billion that was cashed out in the second quarter of 2008 alone. And then the music ended.