Homeowners Refinance Into Bigger MortgagesHousing prices may be falling, but that's not stopping consumers from using their homes as piggybanks. Nearly three-quarters, or 73%, of borrowers with mortgages backed by Fannie Mae (FMR) who refinanced in the first quarter took out bigger loans, cashing out some of the appreciation in the price of their homes.
That was down slightly from the fourth quarter and not far from recent highs. Fannie says cash-out refinancing activity peaked in the second quarter of last year at 82%.
The story is similar at Freddie Mac (FRE) , where 82% of borrowers who refinanced in the first quarter increased the size of their mortgages by at least 5%. That figure was unchanged from the fourth quarter of last year.
Freddie says it saw $70.5 billion cashed out in the first quarter, down from a revised $77.0 billion in the fourth quarter of 2006.
Americans continue to pile on debt even as housing prices head south. Earlier this week, the National Association of Realtors said the median price of existing homes sold in the U.S. slipped by 0.3% over the 12 months ended March 31.
The NAR expects median price of a previously occupied home will fall 1.0% this year to $219,800 from the 2006 level.
So why aren't people being more cautious about using their homes as ATMs?
It seems they still have plenty of money in the bank. "Due to the rapid home price appreciation over the past few years, there remains a record amount of home equity for homeowners to tap into," David Berson, Fannie's chief economist, says in a report posted on the company's Web site this week.
He cites the Federal Reserve's estimate that owners' equity in household real estate increased by almost two-thirds between the end of 2000 and the end of last year to nearly $11 trillion.
Freddie Mac's first-quarter data back this up: The median age of Freddie Mac-owned loans that were refinanced last quarter was 3.3 years, so these homeowners had benefited from robust price gains in 2004 and 2005. The median appreciation on these refinanced properties was 24%, providing the owners with ample margin for taking out cash without running down their home equity.
No wonder mortgage lenders are still running so many ads.
Cheap financing is another incentive for cash-out refinancing. According to Freddie Mac, interest rates on 30-year fixed-rate mortgages averaged 6.2% in the first quarter, allowing many homeowners to use the proceeds to pay off higher-cost credit card debt or home equity lines. Amy Crews Cutts, Freddie's deputy chief economist, says the housing agency expects mortgage rates to remain stable; that means that a slowdown in refinancing activity is likely to be gradual.
Because long-term financing is currently just as cheap, if not cheaper, than short-term financing, it can be less costly to tap into your home equity through a cash-out refinancing than through a home equity line of credit. Fannie and Freddie don't track how homeowners spend the money they borrow, but it's possible that some people are using the additional cash from their larger mortgages to pay off more expensive home equity lines.
"Recently, due to the flat-to-inverted yield curve, many borrowers have found that the most economical way to tap in to this home equity is through a cash-out refinancing transaction instead of through a closed-end second lien mortgage or home equity line of credit," Fannie's chief economist says in his weekly report.
Fannie and Freddie buy mortgages from lenders; they then guarantee the interest and principal payments and repackage them as collateral for mortgage-backed securities. Their repeat-borrower databases contain loans backing properties where they have guaranteed successive mortgage taken out by the same borrowers.
The two companies only buy mortgages made to consumers with good credit. So their data do not indicate that weaker borrowers are piling in more debt. In fact, so many subprime borrowers are running into problems that it's becoming tough for them to get new loans.