The Washington Post

Commentary: The refinance boom is over

Freddie Mac’s latest report on refinance activity shows that the refinance boom the industry has seen since the onset of the Great Recession ended in the second quarter of 2014.

The share of borrowers refinancing fell below 50 percent for the first time since the third quarter of 2008. This represents the longest boom since Freddie Mac started its quarterly refinance report in 1990.

Here are a few of the highlights from this quarter’s refinance report.

Of borrowers who refinanced during the second quarter of 2014, 40 percent shortened their loan term, approximately the same as the previous quarter and the highest since 1992.

In the second quarter, an estimated $7.8 billion in net home equity was cashed out during a refinance of conventional prime-credit home mortgages, up from the revised $5 billion last quarter. Adjusted for inflation, annual cash-out volumes during 2010 through 2013 have been the smallest since 1997.

In aggregate, U.S. home equity grew by an estimated $4.1 trillion during the two-year period through March 31, 2014. Much of this gain was attributable to home value gains. For instance, the Freddie Mac House Price Index for the United States rose 17 percent over this same period.

The average mortgage interest rate reduction in the second quarter was about 1.4 percentage points — or a savings of about 24 percent. On a $200,000 loan, that translates into interest savings of about $2,800 during the next 12 months.

Those who refinanced through [the federal Home Affordable Refinance Program, established to help homeowner who owed more than their homes were worth,] during the second quarter of 2014 benefited from an average mortgage interest rate reduction of 1.6 percentage points and will save an average of $3,200 in interest payments during the first 12 months, or about $260 every month.

About 79 percent of those who refinanced their first-lien home mortgage maintained approximately the same loan amount or lowered their principal balance by paying in additional money at the closing table, down 4 percent from the previous quarter. The peak was 88 percent during the second quarter of 2012.

With mortgage rates remaining below 5 percent for the past four years, relatively few homeowners with loans taken in this period would have much incentive to refinance. Consequently, the median age of the original loan outstanding before refinance increased to 7.3 years during the first quarter, the most since the analysis began in 1985 and unchanged from the previous quarter. In the Washington area, the median age has been rising since 2003 and stood at 5.9 years, close to a high of 6.6 years in 2000.

We estimate more than 25 million American borrowers refinanced their loans to the tune of over $70 billion in total interest payment savings during this most recent refinance boom. At the same time, homeowners cashed-out approximately $215 billion in home equity when they refinanced, adjusted for inflation. During the 2001-2004 refinance boom we saw over $600 billion in cash-out refinancing.

With the second-quarter data in, adjusted for inflation, Americans are taking equity out of their homes when refinancing at about the same level we saw in the mid-to-late ’90s. So, even with recent house price gains and rock-bottom, record-setting, all-time low mortgage interest rates we experienced over the past four years, American households are not cashing out equity at rates we’ve seen more recently.

Whether this new found prudence among American homeowners will become permanent remains to be seen.

Frank E. Nothaft is chief economist for the McLean-based housing finance company Freddie Mac. This commentary was adapted from a blog post summarizing the findings of the company’s second-quarter refinance report.



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