CASH-OUT REFINANCE ACTIVITY RISES IN FIRST QUARTER

Highest Level In More Than 15 Years

McLean, VA  – In the first quarter of 2006, 88 percent of Freddie Mac-owned loans that were refinanced resulted in new mortgages with loan amounts that were at least five percent higher than the original mortgage balances, according to Freddie Mac's quarterly refinance review.  This percentage is up from the fourth quarter of 2005, when the share of refinanced loans that took cash out was a revised 81 percent, and is the highest since the third quarter of 1990.

"The share of all mortgages that were for refinance fell slightly in the first quarter of 2006 to 44 percent from 45 percent in the fourth quarter of 2005.  Over that same period interest rates on all mortgages increased between 0.02 and 0.25 percent," said Frank Nothaft, Freddie Mac vice president and chief economist.  "Almost no one is refinancing to reduce their interest rate in today's environment.  In fact, the first quarter of 2006 is the first time in 20 quarters in which the new mortgage rate was higher than the old one for more than half of refinancing borrowers.  One reason why homeowners may be willing to increase the mortgage rate on their first-lien mortgage is because interest rates on most home equity lines of credit have been pushed up again as the Fed increased short-term interest rates in January and March, which in turn pushed up the prime rate.  Home-equity loans are typically linked to the prime rate, which currently is at 7.75 percent, and many home equity loans have rates that are one percent or more above the prime rate.  In contrast, the average rate on 30-year fixed-rate mortgages is presently near 6.5 percent.

"Home equity extraction is expected to fall in 2006 from the very high levels we saw in 2005.  In 2005, the volume totaled $244 billion.  We estimate that $170 billion in home equity will be converted into cash from the refinancing of first-lien, prime, conventional mortgages in 2006.  While more of the borrowers who refinance will be looking to cash-out home equity this year, we expect many fewer refinancings in 2006 and slower home price appreciation relative to last year."  Freddie Mac expects the refinance share of mortgage applications to fall to around 36 percent and home prices to grow at an average rate in the single-digits nationally in 2006, slowing from the 13 percent rate seen in 2005.

Freddie Mac expects 30-year fixed mortgage rates to average half a percentage point higher in 2006 relative to 2005, and the average rate on one-year Treasury-indexed adjustable rate mortgages to rise by one percentage point.

"Refinancing activity still remains very strong, even with higher interest rates," said Amy Crews Cutts, Freddie Mac deputy chief economist.  "Total mortgage originations were down in the first quarter by an estimated 24 percent, but the strong overall refinance share along with the very high proportion of borrowers who extracted equity through refinance led to an extraction of home equity through prime first-lien refinances of $59.6 billion in the first quarter. This  volume is down only 16 percent from the fourth quarter of 2005's revised equity extraction volume of $70.9 billion. We expect the share of all refinance borrowers who take out cash to remain high in 2006, but as mortgage rates continue to climb, the refinance share should drop to around 33 percent."

In the first quarter of 2006, the median ratio of old-to-new interest rate was 0.98.  In other words, one-half of those borrowers who paid off their original loan and took out a new one had an interest rate on their old loan that was at least two percent lower than the new interest rate.

"The first quarter of 2006 was the first time in five years that we saw more than half of borrowers increase their mortgage rates when they refinanced.  The difference is small enough that the average borrower's mortgage payment barely changed, but it is a significant turn from the trend of significantly lower payments that we came to enjoy since the start of 2001," said Cutts.  "Many borrowers will be looking to refinance this year when their adjustable rate mortgages hit the first rate reset or as a low-cost way to fund a major project, such as a home improvement, or to consolidate other debt.  The average rate on a 30-year fixed rate mortgage is at 6.5 percent, still well below the 35-year average rate of 9.4 percent recorded by the Primary Mortgage Market Survey^SM and the current prime rate of 7.75 percent."

The Cash-Out Refinance Report also revealed that properties refinanced during the first quarter of 2006 experienced a median house-price appreciation of 30 percent during the time since the original loan was made, up from 29 percent in the fourth quarter 2005.  For loans refinanced in the first quarter of 2006, the median age of the original loan was 3.0 years, about one month older than the median age of loans refinanced during the fourth quarter of 2005.

These estimates come from a sample of properties on which Freddie Mac has funded at least two successive loans.  Transactions are further screened to verify that the latest loan is for refinance rather than for home purchase. The Freddie Mac analysis does not track the use of funds made available from these refinances

Notes:

¹Higher loan amount refers to loan amounts that were at least 5 percent greater than the amortized unpaid principal balance (UPB) of the original loan. "Lower loan amount" refers to loan amounts that were less than the amortized UPB of the original loan.

²Ratio of old to new rate refers to the ratio of the interest rate of the refinanced loan to the interest rate of the new loan.

These data can be found at www.FreddieMac.com/news/finance/data.html. For more information, contact us at chief_economist@freddiemac.com

Freddie Mac is a stockholder-owned company established by Congress in 1970 to support homeownership and rental housing. Freddie Mac fulfills its mission by purchasing residential mortgages and mortgage-related securities, which it finances primarily by issuing mortgage-related securities and debt instruments in the capital markets. Over the years, Freddie Mac has made home possible for one in six homebuyers and nearly four million renters in America.

###