Among the drivers of the wave of cash-in refinancings in the fourth quarter was consumers looking to bring their jumbo mortgage down to the conforming limits to benefit from lower rates and fees, an analyst with Braver Stern Securities said.
Freddie Mac came out with a study which looked at its own portfolio and found that 46% of its borrowers who refinanced into another Freddie Mac loan lowered their principal balance by making a payment at the closing table. This is up from 35% in the third quarter of 2010 and 36% in the fourth quarter of 2009.
At the opposite end of the spectrum, refis where borrowers took cash out of their properties and increased their loan balance by at least 5% fell to a 16% share, the all-time low since Freddie Mac started compiling this data in 1985. The average cash-out share over the past 25 years has been 62%.
Another 39% did not make a change in their principal balance. The median age of a refinanced loan was 4.1 years and the median appreciation of a refinanced property was -3%.
Braver Stern head of investment strategy Scott Buchta said there also has been similar activity with borrowers going from nonconforming to conforming loans and that has been for two reasons. Besides bringing their loan into the conforming limit range, these borrowers are also looking to bring their loan-to-value ratio under 75% and benefit from lower fees due to loan level pricing adjustments.
This is especially true for borrowers whose loans were within $50,000 of the conforming loan limit; another group similarly inclined to act would be those whose LTVs were in the upper 70% area.
However, Buchta noted, with interest rates now moving back towards the 5% mark, he expects the percentage of cash-in refis to drop back towards the 20% to 30% until the June expiration of the Home Affordable Refinance Program.
According to Freddie Mac, because of the low number of cash-out refis, just $6.8 billion in net home equity was converted to cash in the fourth quarter, the least amount (adjusted for inflation) since the first quarter of 1997.
For the full year, a mere $32 billion of home equity was cashed-out, compared with $318 billion in 2006, one of the boom years.
Frank Nothaft, Freddie Mac vice president and chief economist, said, “Early in the fourth quarter mortgage rates on 30-year fixed-rate conforming loans were at very low levels, the likes of which haven’t been seen in more than 50 years. This encouraged borrowers who could do so to refinance, and many looked at their other investment options and chose to pay down a bit of their mortgage at the same time.”
The median interest rate reduction was 1.25% or a savings of 22% in interest costs. Over the first year after a refi, the borrower will save $1,850 in principal and interest payments on a $200,000 loan, according to Freddie Mac.
Buchta commented that by choosing to pay down principal and refinance a $450,000 loan at 4.5% instead of 5.25%, borrower would reduce his or her annual payment by $4,464.
