Monday, May 10, 2010

FEWER AMERICAN HOMEOWNERS USING HOME EQUITY AS A CASH STATION

Most American homeowners who recently refinanced their primary residence have stopped using home equity as a cash station.

According to Freddie Mac’s quarterly Refinance Report, 72 percent of borrowers who refinanced in the first three months of 2010 kept their loan balance largely unchanged or reduced it as a result of the refinance.

Meanwhile, the “cash-out” borrowers, those that increased their loan balance by at least 5 percent to spend money on everything from home improvements to leisure boats and exotic vacations, represented 28 percent of all refinance loans.

The cash-out shares recorded over the last two quarters were the lowest since the analysis began in 1985, Freddie Mac noted.

“In the first quarter, about $9 billion in home equity was cashed out by homeowners when they refinanced their conventional prime-credit home mortgage, the smallest quarterly inflation-adjusted amount in 10 years, since the third quarter of 2000,” said Frank Nothaft, Freddie Mac vice president and chief economist.

It’s not that most Americans are suddenly becoming more frugal. The main causes of the decline in cash-out refinance were reduced home prices and tighter underwriting standards for loan-to-value ratios, Freddie Mac noted.

Among the refinanced loans in Freddie Mac’s analysis, the median appreciation of the collateral property was a negative 4 percent over the median prior loan life of four years.

In the first quarter of 2010, half of borrowers who refinanced their conventional loan lowered their mortgage interest rate by at least 16 percent, Freddie Mac reported. The new interest rate was 0.9 percentage points or more below the old rate for half of borrowers.

“Rates on 30-year fixed-rate mortgages during the first quarter remained low, averaging 5 percent in Freddie Mac’s Primary Mortgage Market Survey,” noted Nothaft. “The median interest-rate savings for borrowers who refinanced their conventional loan in the first quarter was 0.9 percentage points.”

Refinances accounted about three-fourths of mortgage originations during the first quarter, Freddie Mac said. In total, the lower rate translates into about $2 billion in interest savings for these borrowers over the first 12 months of the new loan.

These estimates come from a sample of properties on which Freddie Mac has funded two successive loans, and the latest loan is for refinance rather than for purchase. The analysis does not track the use of funds made available from these refinances.

Freddie Mac’s Primary Mortgage Market Survey reported that 30-year fixed-rate mortgages averaged 5.06 percent at the end of April. Last year at this time, the 30-year loans averaged 4.84 percent.

“Mortgage rates on 30-year fixed loans have averaged about 5 percent over the first four months of this year, staying within a band of roughly a quarter percentage point and virtually matching 2009’s annual average,” said Nothaft. “These low rates have been helping to moderate house price declines over the course of the year,” Nothaft said.

On a positive note, Nothaft said, prices on existing homes “showed a 12-month increase of 0.7 percent in February, which was the first annual increase since December 2006, according to the S&P/Case-Shiller® 20-city composite index.”

In addition, nine cities experienced positive growth, matching the number in January. Further, the Census Bureau’s Constant Quality price index showed that new home prices rose 2.5 percent in the first quarter on an annual basis, Nothaft said.