Freddie Mac: Refinance Share Of Mortgage Activity To Fall To 38% In 2014

Everyone knows that refinancing volume fell considerably in 2013, due to rising interest rates – so what is the forecast for 2014?

Government-sponsored enterprise Freddie Mac is predicting that refinances will fall to 38% of all mortgage originations in 2014, as interest rates continue to rise and the mortgage industry shifts to a purchase market.

For comparison purposes, for the week ending Jan. 30, the refinance share of mortgage activity decreased to 62% of total applications from 64% the previous week, according to the Mortgage Bankers Association.

‘Our latest refinance report shows the refinance boom continued to wind down as the pool of potential borrowers declined and as mortgage rates increased during the second half of 2013,’ says Frank Nothaft, vice president and chief economist for Freddie Mac, in a release for the company's fourth quarter 2013 quarterly refinance analysis.

The report finds that borrowers continued to take advantage of near record-low mortgage rates to lower their monthly payments and shorten their loan terms. What's more, borrowers overwhelmingly chose the safety of long-term fixed-rate mortgages as they closed out 2013. These borrowers will save an estimated $21 billion in interest over the next year.

Of the borrowers who refinanced during the fourth quarter, 39% shortened their term – up 2% compared to the third quarter and the highest since 1992. Further, 42% of those who refinanced outside of Home Affordable Refinance Program (HARP) took out a shorter-term loan, while 35% of HARP borrowers shortened their term. About 56% of borrowers kept the same term, and only about 5% lengthened their term.

More than 95% of borrowers who refinanced in the fourth quarter chose a fixed-rate loan. Fixed-rate loans were preferred regardless of what the original loan product had been. For example, 94% of borrowers who had a hybrid adjustable-rate mortgage (ARM) refinanced into a fixed-rate loan during the fourth quarter. In contrast, only 3% of borrowers who had a fixed-rate loan chose an ARM.

The net dollars of home equity converted to cash as part of a refinance remained low compared to historical volumes. In the fourth quarter, an estimated $6.5 billion in net home equity was cashed out during a refinance of conventional prime-credit home mortgages. The peak in cash-out refinance volume was $84 billion during the second quarter of 2006. Adjusted for inflation, annual cash-out volumes during 2010 through 2013 have been the smallest since 1997.

The average interest rate reduction in the fourth quarter was about 1.5 percentage points – a savings of about 25%. On a $200,000 loan, that translates into saving about $3,000 in interest during the next 12 months. Homeowners who refinanced through HARP during the fourth quarter benefited from an average rate reduction of 1.7 percentage points and will save an average of $3,300 in interest during the first 12 months, or about $275 every month.

About 83% of those who refinanced their first-lien home mortgage maintained about the same loan amount or lowered their principal balance by paying in additional money at the closing table. That's just shy of the 88% peak during the second quarter of 2012.

As to be expected, in areas where house price declines were more severe, the share of ‘cash-out’ borrowers was smaller. Median house values on refinance loans have declined in nine of the 10 areas tracked by Freddie Mac, with the sharpest declines in Miami and Detroit. Of the 10, San Francisco was where median house prices increased. The share of borrowers who maintained the same loan amount or lowered their principal balance was above 80% in all 10 metropolitan areas tracked.


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