Refinances Seen Falling to 38 Percent Market Share in 2014

Homeowners who refinanced throughrnFreddie Mac in 2013 continued to display fiscal restraint, choosing fixed raternmortgages, keeping essentially the same mortgage balance, and in many cases optingrnfor shorter-term loans to build equity more rapidly.  In doing so homebuyers who refinanced duringrnthe year will save approximately $21 billion on net over the first 12 months ofrntheir new loans.</p

The results of Freddie Mac’s fourthrnquarter refinance analysis showed borrowers are continuing to take advantage ofrnlow rates, with the refinancing shaving an average of about 1.5 percentagernpoints off of their old rate; or an average reduction of 25 percent.  On a $200,000 loan this translates intorn$3,000 in interest over 12 months.  Homeownersrnwho refinanced through the Home Affordable Refinance Program (HARP) benefitedrnfrom an average rate reduction of 1.7 percentage points and will save anrnaverage of $3,300 in interest during the first 12 months. </p

Thirty-nine percent of those whornrefinanced during the fourth quarter of 2013 shortened the term of their loanrncompared to 37 percent in the third quarter. rnThis was the highest percentage since 1992.  Homeowners who refinanced through HARPrncontinued to take advantage of incentives offered by the program to shortenrnloan terms with 42 percent choosing to do so compared to 35 percent of thosernfinancing outside of HARP.  Only 5rnpercent of borrowers picked longer loan terms for their new loans.  </p

Only $6.5 billion in net home equityrnwas cashed out through refinancing in the fourth quarter compared to $7.1rnbillion in the third quarter.  . The peakrnin cash-out refinance volume was $84 billion during the second quarter of 2006.rnAnother $6.1 billion was used to consolidate home equity loan balances into thernfirst mortgage at the closing table.  Aboutrn83 percent of those who refinanced their first-lien home mortgage maintainedrnabout the same loan amount or lowered their principal balance by paying inrnadditional money at the closing table. That’s just shy of the 88 percent peakrnduring the second quarter of 2012. </p

During the entire year the totalrncash-out from refinancing was $32.1 billion compared to $320.5 billion duringrnthe 2006 peak.  Adjusted for inflation,rnannual cash-out volumes during 2010 through 2013 have been the smallest sincern1997.  </p

More than 95 percent of refinancingrnborrowers chose a fixed-rate loan. Fixed-rate loans were preferred regardlessrnof what the original loan product had been. For example, 94 percent ofrnborrowers who had a hybrid ARM refinanced into a fixed-rate loan during thernfourth quarter. In contrast, only 3 percent of borrowers who had a fixed-raternloan chose an ARM. </p

The median age of a mortgage that wasrnrefinanced during the quarter increased to 7.0 years, the oldest median since FreddiernMac began its analysis.  The company saidrnthis reflected the duration of prevailing low interest rates; that is fewrnhomeowners who took out their mortgages within the last four year have muchrnincentive to refinance. </p

Frank Nothaft, Freddie Mac vicernpresident and chief economist said, “Our latest refinance report shows thernrefinance boom continued to wind down as the pool of potential borrowersrndeclined and as mortgage rates increased during the second half of 2013. We arernprojecting the refinance share will be just 38 percent of all originations inrn2014 as refinance falls off further and the emerging purchase market consumes arnbigger piece of the pie.” </p

Freddie Mac’s refinance analysis isrnbased on a sample of properties on which Freddie Mac has funded two successivernconventional, first-mortgage loans with the latest being for refinance ratherrnthan for purchase. During the fourth quarter of 2014, the refinance share ofrnapplications averaged 56 percent in Freddie Mac’s monthly refinance survey, andrnthe ARM share of applications was 10 percent in Freddie Mac’s monthly ARMrnsurvey, which includes purchase-money as well as refinance applications.

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