May 13, 2011 (Chris Moore)
The housing bust, and subsequent housing price crash, has crimped Americans penchant of using their homes as piggy banks. Over the past 25 years, 62 percent of refinanced loans were “cash-out” loans where the borrower increased their loan balance by five percent or more, but now according to the latest report from Freddie Mac, only 25 percent of all refinanced loans in the first quarter of 2011 were cash-out loans.
According to the results of Freddie Macs first quarter refinance analysis, 3 out of 4 homeowners who refinanced their first lien mortgage either maintained about the same amount on their principal loan or paid additional funds to lower the amount of their mortgage principal.
Twenty-one percent of the homeowners reduced their principal balance by paying additional funds and 54 percent maintained the same loan amount, the highest share since Freddie Mac began keeping records in 1985.
As a comparison, in 2006, the peak of the housing and refinancing boom, borrowers took out $83.7 billion from their homes in the second quarter of that year. In the first quarter of 2011 an estimated $6.0 billion in net home equity was cashed out. No wonder Hummer went out of business!
Frank Nothaft, vice president and chief economist of Freddie Mac, stated, “Consumers continue to reduce their debt, either by paying down or paying off their mortgage loan or reducing the interest cost. Homeowners’ aggregate financial-obligation ratio, which peaked during the third quarter of 2007, had dropped by the end of 2010 to a level last seen more than a decade ago.”
The median interest rate reduction for a 30-year fixed-rate mortgage was about 1.2 percentage points, or a savings of about 20 percent in interest costs. Over the first year of the refinance loan life, these borrowers will save over $1,800 in interest payments on a $200,000 loan.
The report found that the median appreciation of the collateral properties that refinanced was a negative six percent over the median prior loan life of five years, meaning the median life of the loans that were refinanced was five years and the median depreciation of those homes was six percent. By comparison, Freddie Mac’s House Price Index shows a 21 percent decline in home values in its portfolio from 2005 through the end of 2010.
It all adds up to a lot less coin in the piggy bank.
Tags: Freddie Mac, piggy banks, cash-out loans, refinanced loans, cash-in loans, mortgage principal, refinance analysis report, interest rate reduction