Fannie Mae: Almost All Q2 Refis Involved Equity Extraction
Submitted by
CalculatedRisk on Mon, 08/14/2006 - 6:53am (14 comments)
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Not to be too glass half empty in my thinking, but now that the fed is showing signs of peaking on the rate hikes, people start getting into fixed-rate loans. Isn't this about as opposite as you want to get in an ideal world? Is this just desperation sinking in?
Mike, fixed rates are still very low by any historical measure. Anyone with an ARM who moved into a fixed is doing the right thing in my book, whatever you may believe the Fed is up to. It is hardly possible that rates will go back down to where they were in 04-05, if they go down at all.
CR, I also noted that those refinancing to take out equity are doing so at higher rates. Again, this goes back to my point in an earlier thread about how desperate people are to make up the difference in stagnant wages. Obviously, this is an untenable situation.
Berson is just using Freddie Mac data, so there's no independent confirmation here.
Fred, I guess I thought it was different data (the BEA is clearly different data) ...
From the Freddie/Fannie data, and the BEA data, it appears equity extraction was strong in Q2.
Mike, I would consider an ARM today, but I would have to work the numbers. The current margin on the 1 Year ARM is about 2.75% and the 1 year is yielding 5.12% - so the current fully adjusted rate would be 7.87%. The 30 year is at 6.55%.
You would pay less on the ARM until the mortgage adjusted, so it depends on your circumstances. It might make sense to use an ARM if you think 1 year treasury rates will fall - (or whatever benchmark your loan would be indexed to) or you are moving in a few years.
Peter, I agree. All the evidence suggests many homeowners are using the "Home ATM" to maintain their lifestyles.
Best to all.
Look for Q3 GDP to still be strong - all that refi equity extraction has to go somewhere... probably to Target, Best Buy & Home Depot.
peter, rates are not historically low. in fact, they're about at the midpoint of the 70 year average.
if the homehowners were consolidating several loans or converting credit card debt or HELOC to mortgage, wouldn't it still show up as a cash out?
So the percentage of refinances getting cash out of their homes seems to be peaking. I wonder how many loans they are doing, though. Are overall applications down? How much cash is this bringing into the economy?
Yeah, that has to go into paying bills. Don't see why you think Q3 GDP will be strong with falling business spending, which is showing further decrease. Individual Consumer spending is a lagging indictor and ignorable at this point.
Is there a report that shows this in dollar terms? I would have thought that the number of refinancings would be lower by now.
"peter, rates are not historically low. in fact, they're about at the midpoint of the 70 year average."
anon, including the depression in that average skews it to the low end. Post-war rates are indeed historically low.
" Mike, fixed rates are still very low by any historical measure. Anyone with an ARM who moved into a fixed is doing the right thing in my book, whatever you may believe the Fed is up to. It is hardly possible that rates will go back down to where they were in 04-05, if they go down at all."
While I agree that a fixed is better than an ARM. I simply don't accept this "historic low" meme that keeps getting repeated.
I contend that if you go back more than 30 years and included the whole post war period you see that we are not in a "historical low"
The late 70s and early 80s was an anomaly of very high rates and skews the average much higher. If it is treated as one statistically you see we are in an historically average period, not a low one.
ote to fred c. dobbs - Berson's article clearly states that he's using Fannie's data. Why on earth would he be using Freddie's data?????
Everyone is focused on the PERCENT cash-out. But there are two primary reasons to refi - 1) get a lower rate, 2) cash out. When interest rates rise, 1) disappears, leaving only 2). Note the peaks in the graph - when interest rates fall, the cash out share is small, when rates rise, the cash out rate approaches 100% - BECAUSE the lower rate reason DISAPPEARS. Information on the number of cash out loans would be interesting, and might say something about the reliance on the housing ATM, but all anyone talks about is the percent, which seems to me to be pretty uninteresting.
In reading Berson's report (I've been out of the loop for a bit) I couldn't help noting the 6 percent of people moving from FRM to ARM. You gave some reasons for doing that above, but that doesn't make much sense to me. If you're in an FRM and are switching to an ARM for short term gain, won't the transaction costs and increased risk eat up the value?
Also, put me in the desire for hard numbers camp. I would love to know what these percentages translate to in terms of households, 10,000? 100,000? How many people actually took these loans?
Actually, all of the refinancings at the moment scare me. At least the ARMs to FRMs are getting certainty and possibly even lower payments, but why would an FRM to FRM refi be happening now instead of last year or the year before when rates were better?
If the economy and real estate market were healthier I think refis would be off a lot more than 30 percent.