FREDDIE MAC QUARTERLY SURVEY FINDS REFINANCED MORTGAGES AVERAGE 1 1/8 PERCENTAGE POINTS LOWER THAN ORIGINAL MORTGAGE

Added Homeowner Savings On Housing Continues To Prop Up Lack Luster Economy

McLean, VA  – In the fourth quarter of 2002, 41 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 fourth quarter of 2001, when 48 percent of refinanced loans had higher new loan amounts, and to the third quarter of 2002 when 44 percent of refinanced loans in had higher new loan amounts.

“When mortgage rates reach new lows, most families who refinance do so to get a lower mortgage rate and a better loan term.   They do not tap into their home equity,” said Frank Nothaft, Freddie Mac chief economist.  “Looking toward 2003, we believe that by the third quarter of 2003 the refinancing market will have cooled considerably as interest rates begin to rise.”

For 2002 as a whole, 47 percent of families who refinanced increased their first mortgage loan amount by at least five percent.  “By region, families in the Northeast were more likely to draw on their accumulated home equity when they refinanced.  For 2002, 52 percent of families in the Northeast took cash out of their home at refinance, the highest rate of the four regions we look at,” observed Nothaft.  “In the Northeast, families experienced a considerably higher appreciation rate between the dates of the original mortgage and the new refinance mortgage – 22 percent.  This occurred partly because of the very healthy house price growth in the Northeast and also partly because homeowners held the original loan slightly longer on average – 3.9 years – than in other areas of the country.”

Freddie Mac’s most recent quarterly economic forecast sees the 30-year fixed-rate mortgage rates (FRMs) continuing to hover around 6 percent in the first quarter of this year, and rising slowly to perhaps 6.25 to 6.50 percent by the end of 2003.  Currently, Freddie Mac’s weekly mortgage rate survey shows the 30-year FRM averaging 5.91 percent.

“Our analysis for 2002 also indicates that the average refinanced mortgage has an interest rate about 1 1/8 percentage points lower than the original mortgage, freeing up even more consumer funds than had initially been thought,” stated Nothaft.  “And our weekly mortgage rate survey found that 74 percent of all applications for a mortgage in the fourth quarter were for refinance.  Had this extra source of cash not been available, it would be safe to say that the national economy would have been in much worse condition.”

In 2002, homeowners with conventional, conforming mortgages took about $90 billion in equity out of their homes.  This compares with an estimated $84 billion that was cashed-out and turned back into the economy in 2001.  These estimates are net of the consolidation of about $67 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 $157 billion larger than the first mortgage loans that were paid off during 2002.

“But home equity for all families across the U.S. grew by about $500 billion in 2002, so that 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 refinanced loans continues to remain 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 40 percent over the past 5 years.  Freddie Mac’s economists have revised their forecast to an annualized growth rate of about 4 percent to 5 percent for 2003.

Freddie Mac’s quarterly refinancing review also found that the median age of the refinanced loan was 3.0 years in the fourth quarter of 2002, nearly the same as the median age of loans refinanced in the fourth quarter 2001.  Additionally, about 23 percent of mortgages refinanced in the fourth quarter of 2002 had lower new loan amounts.

The review also revealed that properties refinanced during the fourth quarter 2002 experienced a median house-price appreciation of 9 percent during the time since the original loan was made, down from 13 percent for loans refinanced in fourth 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 analysis does not track the use of funds made available from these refinances.

Freddie Mac is a stockholder-owned corporation chartered by Congress in 1970 to create a continuous flow of funds to mortgage lenders in support of homeownership and rental housing. Freddie Mac purchases mortgages from lenders and packages them into securities that are sold to investors.  Over the years, Freddie Mac has opened the doors for one in six homebuyers and two million renters across America.

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