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

FreddiernMac reported on Thursday that homeowners continue to hit barriers when looking to refinance their home, although it’s not clear whether this isrndue to caution or because they have little equity left in their homes to dornotherwise, or simply because they cannot qualify. We’d point toward all of the above as the main hindrances.</p

During the first quarter ofrn2011, only 25 percent of those who refinanced existing mortgages pulled cashrnout of their home.  Even more striking,rn21 percent took our smaller loans than the ones they were refinancing.  The percentage of homeowners whose loanrnbalance remained unchanged, 54 percent, was the highest since Freddie Mac beganrnkeeping track of such figures in 1985.  FreddiernMac defines a “cash-out” mortgage as one in which the new principalrnbalance exceeds the old one by more than 5 percent.</p

During the quarter an estimated $6 billion in net home equity wasrncashed out during the refinance of conventional prime-credit home mortgagesrncompared to 9.1 billion the previous quarter. rnWhen adjusted for inflation this is the lowest net equity cashed out inrna single quarter since the third quarter of 1996.  </p

Thernaverage home being refinanced during the quarter depreciated in by 6 percentrnsince 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 percentrndecline in its U.S. series between the end of 2005 and the end of 2010. “Thus,rnborrowers who refinanced in the first quarter owned homes that had held theirrnvalue better than the average home, or may reflect value-enhancing improvementsrnthat owners had made to their homes during the intervening years.”  Those who refinanced got a median interestrnrate reduction for a 30-year fixed-rate mortgage of about 1.2 percentage pointsrnor a savings of about 20 percent in interest costs. </p

Frank Nothaft, Freddie Mac vice president and chief economist said,rn”The average interest rate on single-family mortgages outstanding at thernend of 2010 was about six percent, so there are still plenty of homeowners thatrncan benefit from refinancing. We found the typical borrower reduced theirrninterest rate about 1.2 percentage points by refinancing during the firstrnquarter. For a 30-year fixed-rate mortgage with a $200,000 loan balance, that’srna monthly payment savings of about $150.”</p

Freddie Mac, in its press release compares the 25 percent of cash-outrnmortgages in the first quarter to the average cash-out share over the past 25rnyears of 62 percent and the $6 billion in equity pulled out in the most recentrnperiod with the 83.7 billion cashed out in the second quarter of 2006, the peakrnof the refinancing frenzy.  It isrnillustrative of the sea change in housing finance to look more closely at otherrnfigures from that mid decade period. </p

Duringrn14 quarters spanning January of 2005 to June 2008 Americans pulled $887.1rnbillion in cash out of the equity of their homes, an average of $63.4 billion arnquarter.  That didn’t include $109.7 in outstandingrnhome equity lines of credit, equity they had utilized as cash previous tornrefinancing, which they consolidated during that period.  They did this through refinancing their firstrnmortgages at levels that averaged an increase of 24.1 percent more than thernbalance of the loan they were refinancing.</p

In thernfirst 10 quarters after the market started to crash in earnest, total cash-outrndollars as a percentage of aggregate refinanced originations declined steadily,rnfrom 23.4 percent in the third quarter of 2008 to 3.4 percent in the fourthrnquarter of 2010.  Freddie Mac reports thisrnfigure increased slightly in the first quarter to 4.3 percent.  </p

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

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