Tuesday, November 3, 2009

Refinancing in Q309 Saves Borrowers $3bn in 12 Months: Freddie

Posted on the Housing Wire by Diana Golobay:

Half of all borrowers that refinanced their conventional loans in Q309 saw their annual mortgage interest rate drop by at least 17%, according to a quarterly report by mortgage giant Freddie Mac (FRE: 1.13 -1.74%).

Although the new interest rate was only about 1.1 percentage points below the old rate, in aggregate the interest rate reduction adds up to around $3bn in savings for these borrowers over the first 12 months of the new loan, according to a survey of a sample of properties on which Feddie funded at least two successive loans.

During the first nine months of the year, 30-year fixed mortgage interest rates averaged 5.1%, the lowest average over that time frame ever recorded in 38 years of Freddie’s mortgage rate survey, according to vice president and chief economist Frank Nothaft.

Cumulative refinance volumes at Fannie and Freddie, through September. (source: FHFA)

“At the beginning of the year, only borrowers who still had a solid equity cushion could take advantage of the low mortgage rates, but through the Homeownership Affordability Refinance Program (HARP) that got underway in April, borrowers who have a loan owned by Freddie Mac or Fannie Mae can refinance that loan even if they have no home equity,” Nothaft said, adding the Federal Housing Finance Agency (FHFA) indicates that as of August 31, more than 93,000 borrowers refinanced under these terms.

FHFA in July announced the extension of HARP to borrowers with loan-to-value (LTV) ratios up to 125%, effectively broadening the reach of refinance to deeply underwater borrowers.

Of prime borrowers that refinanced a conventional, first-lien mortgage, 64% (the highest share in 6 years) either kept the same principal balance or reduced it, according to Freddie. Cash-out refinancing, where the new loan amount through comes in at least 5% higher than the paid-off first-lien mortgage balance, slipped to a six-year low of 36% in the quarter. Through Q309, borrowers cashed out a total $60bn in 2009.

“Adjusting for inflation, this was the smallest volume of equity extraction over the first three quarters of a year since 2000,” said deputy chief economist Amy Crews Cutts. “The principle cause of the decline in cash-out refinance is that homeowners have a smaller equity cushion. The median property refinanced in the third quarter had no net appreciation over the time since the previous mortgage was taken out, which was three and a half years ago.”

Freddie, together with sister government-sponsored enterprise (GSE) Fannie Mae (FNM: 1.00 -2.91%), refinanced more than 3.5m mortgage loans in 2009 as of September, according to the GSEs’ conservator, the FHFA. The GSEs refinanced 262,000 mortgages in September alone — a slight drop from August as mortgage rates are edging higher than in spring.

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