Low Mortgage Rates, Healthy Home Appreciation Power Strong Refinancing Market In Third Quarter 2002
October 31, 2002
Fixed-Rate Mortgages Reach 36-Year Low, Propelling Refinances to Record Levels
McLean, VA - In the third quarter of 2002, 45 percent of Freddie Mac-owned loans that were refinanced resulted in new mortgages at least five percent higher in amount than the original mortgages, according to Freddie Mac's quarterly refinance review. This is in contrast to the third quarter of 2001, when 60 percent of refinanced loans had higher loan amounts. In comparison, 66 percent of refinanced loans in the second quarter of 2002 had higher new loan amounts.
"Mortgage rates in the last few weeks of September dropped to the levels not seen since about 1965," said Frank Nothaft, Freddie Mac chief economist. "Low interest rates and increasing home values made for record refinancing levels in the third quarter, accounting for approximately 68 percent of applications for mortgages.
"Though it may look like cash out refi's dropped from the second quarter, that is not necessarily so. Refinancings made up only about 43 percent of applications in the second quarter, with 66 percent of those having first mortgage balances that were at least five percent larger. But in the third quarter, a greater number of homeowners refinanced their homes (68 percent) than did so in the second quarter, so even though the share of refinances is smaller (45 percent), the market as a whole was much larger."
Freddie Mac's most recent quarterly economic forecast sees the 30-year fixed-rate mortgage rates (FRMs) hovering at about 6 percent in the fourth quarter of this year, and rising slowly to around 6.25 to 6.50 percent in 2003. Currently, Freddie Mac's weekly mortgage rate survey shows the 30-year FRM averaging 6.31 percent.
"Now that mortgage rates appear to be leveling off, we may see refinancing finally begin to slow down from the frantic pace of most of this year," stated Nothaft. "As mortgage rates rise to slightly higher levels, we will see fewer refinances, but more of those refinances will be taking cash out, since most homeowners will no longer be able to get a lower mortgage rate by refinancing. Therefore, the incentive to refinance becomes that of taking some of the equity out of housing to meet other needs."
Some of the equity that is being taken out of housing is going back into consumer purchasing and investment in home improvements and renovations. In the first three quarters of this year, homeowners with conventional, conforming mortgages took about $59 billion in equity out of their homes. At an annualized rate of about $80 billion, this is a slightly slower pace than that set in 2001, when roughly $84 billion was cashed-out and turned back into the economy. These estimates are net of the consolidation of about $51 billion in second mortgage and/or home equity loan debt into the new refinance loan. Including the pay-off of second mortgages and home equity loans, the refinance loans were an estimated $110 billion larger than the first mortgage loans that were paid off during the first three quarters of 2002.
"However, total home equity grew by $600 billion in 2001, and by another $300 billion in the first half of 2002, so rising home values are simultaneously increasing the wealth of homeowners even as they turn some of that equity into cash," said Nothaft. "The average loan-to-value ratio on refinance loans remains close to 70 percent, showing that the average family maintains a significant quantity of home equity after refinancing."
Freddie Mac's Conventional Mortgage Home Price Index shows the cumulative growth in the value of housing, on a national average, to be about 39 percent over the past 5 years. Freddie Mac's economists have revised their forecast to an annualized growth rate of about 7 percent for all of 2002.
Freddie Mac's quarterly refinancing review also found that the median age of the refinanced loan was 3.1 years in the third quarter of 2002, nearly the same as the median age of loans refinanced in the third three months of 2001. Additionally, about 20 percent of mortgages refinanced in the third quarter of 2002 had lower new loan amounts.
The review also found that properties refinanced during the third quarter 2002 experienced a median house-price appreciation of 11 percent during the time since the original loan was made, down from 18 percent for loans refinanced in third quarter 2001.
These estimates come from a sample of properties on which Freddie Mac has funded at least two successive loans. Transactions are further screened to ensure that the latest loan is for refinance rather than home purchase. The Freddie Mac survey does not track the use of funds made available from these refinances.
| Percentage of Refinances Resulting In: | |||||
| Total U.S. | 5% Higher loan amount |
Lower loan amount |
Median ratio of old to new rate |
Median age of refinanced loan (years) |
Median appreciation of refinanced property |
1997: |
|||||
Q1 |
65% |
10% |
1.07 |
3.8 |
13% |
Q2 |
69% |
10% |
1.02 |
4.3 |
16% |
Q3 |
59% |
15% |
1.07 |
3.9 |
13% |
Q4 |
55% |
17% |
1.12 |
3.9 |
13% |
1998: |
|||||
Q1 |
50% |
14% |
1.18 |
3.7 |
11% |
Q2 |
53% |
15% |
1.17 |
4.5 |
11% |
Q3 |
46% |
18% |
1.16 |
4.2 |
9% |
Q4 |
45% |
21% |
1.20 |
4.1 |
9% |
1999: |
|||||
Q1 |
57% |
13% |
1.19 |
5.0 |
11% |
Q2 |
58% |
14% |
1.17 |
5.3 |
13% |
Q3 |
70% |
11% |
1.09 |
6.2 |
20% |
Q4 |
78% |
9% |
1.02 |
6.0 |
23% |
2000: |
|||||
Q1 |
81% |
9% |
0.97 |
6.1 |
23% |
Q2 |
81% |
8% |
0.95 |
6.4 |
26% |
Q3 |
82% |
9% |
0.95 |
6.4 |
28% |
Q4 |
76% |
10% |
1.02 |
4.9 |
27% |
| 2001: | |||||
Q1 |
51% |
9% |
1.17 |
1.6 |
11% |
Q2 |
58% |
9% |
1.17 |
2.7 |
15% |
Q3 |
60% |
11% |
1.16 |
3.0 |
18% |
Q4 |
48% |
20% |
1.21 |
3.1 |
13% |
| 2002: | |||||
Q1 |
60% |
11% |
1.18 |
3.7 |
17% |
Q2 |
66% |
11% |
1.16 |
3.9 |
22% |
| Q3 | 45% |
20% |
1.20 |
3.1 |
11% |
Source: Freddie Mac
Contact ALTA at 202-296-3671 or [email protected].