Cash-Out Refinance Activity Up as Number of Refinancings Drop

McLEAN, Va. – Fewer homeowners refinanced their homes in the fourth quarter 2005 than the previous quarter, but a larger percentage of those who refinanced did so with loan amounts greater than their original mortgage balances. In its quarterly refinance review, Freddie Mac reported that in the fourth quarter of 2005, 80% of loans it owned that were refinanced resulted in new mortgages with loan amounts that were at least 5% higher than the original mortgage balances. That percentage, said Freddie Mac, is up from the third quarter of 2005 when the share of refinanced loans that took cash out was 73%, and is the highest since the third quarter of 2000. Freddie Mac Vice President and Chief Economist Frank Nothaft said the housing Government Sponsored Enterprise estimates that home equity extraction from refinancing of prime first mortgage liens will result in an extraction of $243 billion in 2005. He further predicted though that equity extraction in 2006 will likely drop “sharply” by a little more than half to about $117 billion “as we expect lower refinance activity and slower house price appreciation. Still Freddie Mac expects the share of all refinance borrowers who take out cash to remain high this year because of the relatively high cost of second mortgages and home-equity lines of credit. Nothaft reported that Freddie Mac expects the refinance share of mortgage applications to fall to about 37% and home prices to increase at an average rate of between 6-8% nationally this year. The company also expects 30-year fixed rate mortgage rates to average three-tenths of a percentage point higher in 2006 than in 2005, and the average rate on one-year Treasury-indexed adjustable rate mortgages to rise by seven-tenths of a percentage point.