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Embracing change can bring success: New tools for the slowing mortgage market

National Mortgage Professional
Jul 30, 2007

Cash-out refinance share steady in first quarterMortgagePress.comCash-out refinance statistics In the first quarter of 2007, 82 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. The revised share for the fourth quarter of 2006 was also 82 percent. "Fixed-rate mortgages averaged 6.2 percent for 30-year product and six percent for 15-year loans during the first quarter of 2007, well below the current rates offered on home equity loans," said Frank Nothaft, Freddie Mac vice president and chief economist. "Home equity loans are generally indexed to a bank's prime rate, currently averaging 8.25 percent. This interest-rate difference provides a big incentive to borrowers to use cash-out refinance as an alternative to a home equity loan. "The refinance share of applications averaged 46 percent in the first quarter of 2007, unchanged from 46 percent in the fourth quarter, according to Freddie Mac's Primary Mortgage Market Survey." Freddie Mac expects 30-fixed mortgage rates to average between 6.3 and 6.5 percent over 2007 and initial rates on one-year treasury-indexed adjustable-rate mortgages (ARMs) to hover near 5.5 percent. In the first quarter of 2007, the median ratio of new-to-old interest rate was 1.02. In other words, one-half of those borrowers who paid off their original loan and took out a new one increased their mortgage coupon rate by two percent or more, or roughly three-eighths of a percentage point at today's level of fixed mortgage rates. "This quarter, we saw $70.5 billion cashed out, down from a revised $77 billion cashed out in the fourth quarter of 2006," said Amy Crews Cutts, Freddie Mac deputy chief economist. "Cash-out refinance volume is expected to decline over 2007 due to an expected six percent reduction in overall mortgage origination activity and a fall in the refinance share of originations to around 44 percent for the year. "Most borrowers with prime adjustable-rate mortgages (ARMs) that were scheduled for an interest-rate adjustment sometime in 2007 have already refinanced these loans. Freddie Mac estimates that in September 2006, there were about $170 billion in prime ARMs outstanding with scheduled rate resets in 2007. As of March 2007, just over $30 billion of these loans remained active." The Cash-Out Refinance Report also revealed that properties refinanced during the first quarter of 2007 experienced a median house-price appreciation of 24 percent during the time since the original loan was made, down from a revised 27 percent in the fourth quarter 2006. For loans refinanced in the first quarter of 2007, the median age of the original loan was 3.3 years, unchanged from the median age of loans refinanced during the fourth quarter of 2007. For more information, visit
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