by Calculated Risk on 8/02/2006 06:46:00 PM

From Freddie Mac: Refinance Activity Slips, But Still Remains Stronger than Expected in Second Quarter

In the second quarter of 2006, 88 percent of Freddie Mac-owned loans that were refinanced resulted in new mortgages with loan amounts that were at least five percent higher than the original mortgage balances, according to Freddie Mac's quarterly refinance review. This percentage is up from the first quarter of 2006, when the share of refinanced loans that took cash out was a revised 86 percent, and is the highest since the second quarter of 1990.

"The staying power of refinance activity has been much stronger than we initially thought," said Frank Nothaft, Freddie Mac vice president and chief economist. "But borrowers are reacting to both incentives to cash out home equity through refinance and incentives to change their mortgage as they hit an interest rate adjustment. Freddie Mac estimates that $500 billion in first lien mortgages will adjust this year and another $650 billion in second liens will see at least one rate change this year.
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"The incentive to take cash out of home equity is partially driven by the rapid rise in short-term interest rates like the prime rate. Many borrowers have seen their rates on home equity lines of credit – which are tied to the prime rate – rise. Now they are consolidating those HELOC loans into a new first lien mortgage to reduce their mortgage payments," said Amy Crews Cutts, Freddie Mac deputy chief economist. "This quarter we saw $81.0 billion cashed out, up from a revised $74.1 billion cashed out in the first quarter of 2006. Cash out activity should remain strong throughout the rest of the year as interest rates are expected to continue to gently climb.

"Because rates on home equity lines of credit have risen to 8.25 percent or higher, borrowers who are looking for an inexpensive way to finance home improvements or business investments, or to consolidate high cost debt, are turning to cash-out refinance. These borrowers are often willing to refinance into higher rates on their first lien mortgages. As previously noted, we saw the median ratio of new mortgage rates to rates on the loan being refinanced rise by eight percent. This is second consecutive quarter in which the median refinance borrower increased the rate on their first lien mortgage. For the 20 quarters prior to 2006, the median refinance borrower was reducing his or her first lien mortgage rate."

Homeowners are still using the Home ATM.