Longest Recorded Refi Boom Ends; New Demographic Emerges
Freddie Mac has officially declared that the refinancing boom is over. The company's Refinance Report for the second quarter of 2014 said that the longest refinance boom in the 24 years since it started keeping records officially ended in the second quarter. That occasion was marked when the share of mortgages originated for refinancing fell below 50 percent for the first time since the third quarter of 2008.
Frank Nothaft, Freddie Mac vice president and chief economist, said, "The housing market realized a significant shift in the second quarter of this year as refinance activity fell below 50 percent marking the onset of the first purchase-dominated market the industry has seen since 2000 and an end to the refinance boom that started in late 2008. In this time we saw fixed mortgage rates hit all-time lows, with the 30-year fixed-rate mortgage falling well below 4 percent. We also estimate over 25 million American borrowers refinanced their loans to the tune of over $70 billion in total interest payment savings. However, since 2008 homeowners cashed-out approximately $215 billion in home equity, adjusted for inflation."
Borrowers who refinanced during the quarter reduced their interest payments on average by about one fourth or 1.4 percentage points. On a $200,000 loan, that translates into mortgage interest savings on average of about $2,800 during the first 12 months of the loan a net aggregate of more than $1 billion. Savings were even greater for those who refinanced through the Home Affordable Refinance Program (HARP). They received an average interest reduction of 1.6 percentage points or more than $260 in monthly savings.
Refinancers also more frequently chose products to hasten their principal pay down. Forty percent of those who refinanced in the second quarter selected shorter term loans. Freddie Mac said that, in light of the wide spread appreciation in home prices over the last two years, both lower rates and shorter terms assure that homeowners are building wealth through home equity acquisition.
According to the Federal Reserve, aggregate home equity across the U.S. grew by an estimated $4.1 trillion between March 31, 2012 and March 31, 2014. Much of the gain was attributable to rising home prices but Freddie Mac's economists say that the minimal level of cash-out refinance activity has also contributed to the rebound in equity.
Shorter term loans also have lower interest rates than longer term ones. The difference between 30-year and 15-year fixed-rate loan rates averaged 0.94 percentage points during the first half of 2014, the largest semi-annual average difference Freddie Mac has ever recorded. Thus the relatively large number of refinancers who choose shorter terms has helped lower the total interest paid on outstanding mortgage debt.
Low mortgage rates, which have consistently remained below 5 percent for the past four years, means that relatively few homeowners with newer loans have had much incentive to refinance. Consequently, the median age of the original loan before refinance remained at 7.3 years during the second quarter, the most since Freddie Mac began their analysis in 1985.
Cash-out refinancing increased slightly in the second quarter. An estimated $7.8 billion in net home equity was cashed out during refinancing of conventional prime mortgages compared to $5.0 billion in the first quarter. Freddie Mac says this is still modest by historical standards. The peak in cash-out refinancing was $84 billion in the second quarter of 2006. From 2010 through 2013 cash-out volumes, adjusted for inflation, have been the smallest since 1997.
About 79 percent of refinancers maintained about the same loan balance or lowered their principal balance by paying in at the closing table. This is down from 84 percent who took out the same or lower balance loans in the first quarter and 85 percent a year earlier. In contrast, 89 percent of those who refinanced in the third quarter of 2006 took cash out at closing.
Nothaft said, "The low level of cash-out refinance volume in the second quarter, despite the estimated $2.8 billion increase over last quarter, reflects how much home equity was lost during the Great Recession. Even with recent home price gains and rock-bottom interest rates, American households are not cashing out equity at rates we've seen historically. Regardless of the minimal level of cash-out refinance activity, when we couple it with lower mortgage rates and shorter terms homeowners have taken out through refinance over the past couple years, they have accelerated principal pay down and contributed to the rebound in home-equity accumulation."
Freddie Mac's economists say that their analysis shows more borrowers are paying down principal faster than their amortization schedule calls for, usually by making an extra payment toward principal whenever possible. Prior to the Great Recession only about 2 to 10 percent of borrowers made such payments but since then the number who have paid down additional principal before refinancing has grown to 16 to 20 percent. This may reflect a decision by some borrowers to reduce the principal to avoid mortgage insurance on the new loan.
Loans through HARP made up about 19 percent of the refinances purchased by Freddie Mac and Fannie Mae in the first five months of 2014. HARP has refinanced 32 million borrowers, most of whom had too little equity to refinance without the program, since its inception through May 2014. Loans refinanced through the program in the second quarter had a median age of 7.3 years and 35 percent of HARP borrowers shorted the term of their loans for which HARP offers an incentive.
Properties refinanced through HARP had depreciated a median of 22 percent since the original loan was closed. For all other refinances during the second quarter the median property value was up 4 percent over the life of the old loan. The prior loan had a median age of 7.4 years and 42 percent of borrowers shortened their loan terms.
Freddie Mac's refinancing statistics come from a sample of properties on which it has funded to successive conventional, first-mortgage loans, the latest for refinancing. The company does not track the use of funds made available from refinancing and does not track loans paid off with no new loan placed. Some loan products, such as 1-year ARMs and balloons, are based on a small number of transactions.