Cash-Out Refis Lowest in Four Years

Fifty-six percent of Freddie Mac-owned loans were cash-out refinances in the first quarter of 2008, the smallest percentage since Q2 in 2004, the GSE said Friday. First quarter’s share compares starkly to the 77 percent share of refinancing posted just one quarter earlier, and underscores the new reality for most homeowners. “A tightening of mortgage underwriting standards throughout the lending industry coupled with declining home values across much of the nation has curtailed the amount of home equity cashed out by homeowners,” said Frank Nothaft, Freddie Mac vice president and chief economist. Six out seven refinances in 2006 and 2007 had a cash-out component, Nothaft said, and many borrowers increased their mortgage rates to access that cash. In contrast, during the first three months of this year, more than half of all borrowers who refinanced lowered their mortgage rate. “During the first quarter about $29 billion in home equity was cashed out through refinance of conventional loans made to prime borrowers, off from a downwardly revised $36 billion cashed out in the fourth quarter of 2007. This is about one-third of the amount cashed out in the same quarter a year earlier,” said Amy Crews Cutts, Freddie Mac deputy chief economist. “While research has shown a limited effect in the current quarter of equity conversion into cash, the reduced equity extraction we saw in the first quarter will likely be felt in the consumption and investment decisions of households later on.” It’s an interesting point — that the drop in mortgage equity withdrawal likely hasn’t yet been felt in consumption just yet. So far, economic pundits told HW, much of the drop in consumption has been more directly tied to rising energy prices. “The Fed’s Flow of Funds report shows that national aggregate homeowners’ equity fell just a little over four percent from the first quarter 2007 peak through the end of the year,” Crews Cutts said. “As a share of the aggregate value of real estate holdings of households, aggregate equity has fallen below fifty percent for the first time in the 56-year history of the Fed’s measurement. While in total dollars households still hold a hefty home-equity cushion of over $9.6 trillion, their ability and willingness to tap into it is diminished in the current environment.” For more information, visit

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