Refinancing remains strong in second quarter

In the second quarter of 2006, 88 percent of refinanced Freddie Mac-owned loans resulted in new mortgages with loan amounts that were at least 5 percent higher than the original mortgage balances, according to the review. By comparison, in the first quarter, the share of refinanced loans that took cash out was a revised 86 percent.

“The staying power of refinance activity has been much stronger than we initially thought,” said Frank Nothaft, Freddie Mac vice president and chief economist, in a news release.

He noted that many borrowers are considering refinancing as they hit interest-rate adjustments.

Freddie Mac estimates that $500 billion in first lien mortgages will adjust this year, and $650 billion in second liens will undergo at least one rate change in 2006.

Freddie Mac continues to expect 30-year fixed mortgage rates to average a little more than 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 slightly more than one percentage point.

In the second quarter, half of the borrowers who paid off their original loans and took out new ones had interest rates that were nearly 7 percent lower than the rate on the new loans.

“The incentive to take cash out of home equity is partially driven by the rapid rise in short-term interest rates like the prime rate,” said Amy Crews Cutts, Freddie Mac deputy chief economist.

“Many borrowers have seen their rates on home equity lines of credit – which are tied to the prime rate – rise. Now they are consolidating those (home equity line of credit) loans into a new first lien mortgage to reduce their mortgage payments,” Cutts added.

The Cash-Out Refinance Report also revealed that properties refinanced during the second quarter experienced a median house-price appreciation of 33 percent during the time since the original loan was made, up from 31 percent in the first quarter 2006.

For loans refinanced in the second quarter, the median age of the original loan was 3.2 years, about two months older than the median age of loans refinanced during the first quarter.

Freddie Mac is a stockholder-owned company established by Congress in 1970 to support homeownership and rental housing.

Freddie Mac purchases residential mortgages and mortgage-related securities, which it finances primarily by issuing mortgage-related securities and debt instruments in the capital markets.