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Record Number of Borrowers who Refinanced in Q4 Lowered Principal Balance: Freddie Mac

According to ""Freddie Mac's"":http://www.freddiemac.com/index.html quarterly Refinance Report, 33 percent of borrowers who refinanced their loan in the fourth quarter of 2009 lowered their principal balance.


This was the highest ""cash-in"" share recorded since the GSE began tracking the characteristics of refinance transactions in 1985. The next highest share of cash-in refinancing occurred in the fourth quarter of 1993 when 23 percent of borrowers lowered their mortgage debt during refinance. In addition, the report showed that the share of borrowers who increased their loan balance by 5 percent or more during the fourth quarter was at a record low of 27 percent.

""Rates on 30-year fixed-rate mortgages set a new record low during the first week in December at 4.71 percent and over the quarter averaged just 4.9 percent in Freddie Mac's Primary Mortgage Market Survey,"" said Frank Nothaft, Freddie Mac VP and chief economist. ""One-half of borrowers who refinanced their conventional loan during the quarter lowered their annual mortgage interest rate by at least 0.9 percentage points below the old rate.""

In aggregate, the lower interest rate translates into about $2 billion in payment savings for these homeowners over the first 12 months of the new loan, and monthly payment saving were even greater for families who paid down their mortgage balanced when they refinanced, Nothaft said.

""This transformation from a cash-out refi market to a cash-in refi market is consistent with other data we've seen on households reducing their overall debt burdens, particularly revolving credit like credit cards,"" Nothaft explained. ""From September of 2008 to November of 2009, consumers cut $100 billion dollars in revolving debt from their obligations, according to the Federal Reserve Board.""

Amy Crews Cutts, Freddie Mac deputy chief economist, said approximately $11 billion in home equity was cashed out by homeowners in the fourth quarter when they refinanced their conventional prime-credit home mortgage. This was the smallest quarterly amount in nine years. For all of 2009, she said the total amount of equity cashed out was just under $70 billion, the lowest annual amount since 2000.

""The main causes of the decline in cash-out refinance are declining home prices in many areas of the country that have eliminated equity that could have been extracted and tighter underwriting standards for loan-to-value ratios,"" Crews Cutts said. ""Among the refinanced loans in our database, the median appreciation of the collateral property was a negative 2 percent over the median life of the prior loan of 3.6 years.""

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