Cash-out refinancing Strong in Q3
Submitted by
CalculatedRisk on Wed, 11/01/2006 - 1:16pm (27 comments)
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Wait... does this mean we had these miserable Q3 GDP numbers with equity extraction still going strong, or is something here leading and something else lagging?
ac, yes, equity extraction was still strong in Q3. The GDP supplement report provided the first clue about Q3 MEW - and this provides further confirmation (we have to wait until the Flow of Funds is released on Dec 7th for the actual number).
Also, consumer spending was OK in Q3. As prices fall, MEW will decline and I suspect consumer spending will weaken.
Best Wishes.
It means that refi total aggregates are adding less to the GDP number, but that those who are refinancing are taking equity out of their houses faster than usual despite less favorable financial conditons. This report covers only the sunnier 50% of the market, yes?
The falling refi numbers is what I expect until the house prices reasssert themselves..not in the near future.
"The median ratio of new-to-old interest rates was the highest since Freddie began compiling the information in 1985."
Seem to me that one of two factors (or both) are at play here:
1) ARM holders swapping out before their rates reset, or
2) Desperate need for cash.
Sure would be interesting to know how many folks belong in either camp.
Fire? What fire?
"Half of the borrowers who paid off their original loan and took out a larger new one increased their mortgage rate by about 3/8 percentage point, Freddie Mac said."
That really tells you everything. It was one thing to refinance and take advantage of low rates in 2003, and maybe take some cash out at the same time. Now people taking a worse rate just to get the cash out. If you owed $100,000 at 7%, refinanced at 7.37% and took an extra $10,000, you basically took a loan for $10,000 at 10-11%.
Thanks for running that through for me Bob (seriously, these are the very things that I need to have running through because I never initate them.) The typical refi amount I had always thought would be larger (and maybe it was in 2003). [Acutally I just look at the median ARM and take that number ~$350k.] The costs I had heard were more than $1000 for your typical but ever-so-deft pen-strokes. (Roach did this calc in 2003 and came up with $3000 IIRC.).
Anyhow, the reappraisal esp on those IO loans where you have paid zero against the principal (unlike the regular loans where your inroads could amount to as much as several dollars! off that $350k) is critical. And so buyers in the last year have seen what little appreciation in their asset ebb away. Not too many of them would be exercisizing the refi IMCALCULATINGO. So the exercises are those with older mortgages on property that has had time to appreciate beyond the costs of refinancing (those fees and those higher interest rates). It's still cheaper than the >20% credit card rates and who knows, their property might be worth less in 6 months than it is now! I'm sure that's how they justify the refinancing.
maybe the fact that MEW was strong and GDP weak tells you the correlation might not be as strong as you think.
Meanwhile, I also found this interesting from MarketWatch.com:
"MasterCard shares rallied 18% to $87.13, surpassing its previous high of $76.25 on Tuesday.
The Purchase, N.Y., credit-card company cited 15% growth in gross dollar volume, a 19% increase in the number of transactions processed; and a restructuring of cross-border transaction fees.
"These strong results underscore our success in displacing paper-based forms of payment in all corners of the globe in the face of a highly competitive payments market," said Robert W. Selander, MasterCard president and chief executive officer. "
"(the CEO) cited an account win of Washington Mutual's debit portfolio and an overall shift to paying with plastic."
Richard, MEW was pretty strong and PCE growth was decent (3.1%); GDP was weak (1.6%) primarily because of RI. So there is nothing here that would be counter to the academic papers suggesting a link between MEW and consumption.
It is pretty clear that MEW is going to decline - so we will find out if PCE is then weak. It will take more than one or two quarters to find out.
Best Wishes.
More complete information is (finally) up on Freddie Mac:
Refinance Activity Remains High; Cash-Out Share Increases in Third Quarter. - News Archive - Freddie Mac
I notice that the median value of the refinanced property dropped slightly from last quarter at the the same time that the median age of the refinanced loan increased slightly.
CR, I'm not yet convinced "that MEW is going to decline" SIGNIFICANTLY. Check out ten year yields, they are irrationally low considering the debt & risk in the markets. If mtg. rates follow the ten year Treasury yield lower, there could be a HUGE rush to extract equity. (Remember, in O.C., CA, home prices are still flat to up yoy.)
My guess is, everyone who counts, from Paulson to FED decision makers, now recognizes how devastating a housing reversion to its long-term mean growth rate would be. This explains the absurdly weak FED non-conforming mtg. "Guidance". My guess is, their plan is to watch & facilitate easy money as best they can. (We're certainly NOT going to see them buying the ten year!) So, until I see evidence to the contrary, I'm guessing we'll see easy credit for as long as they can get away with it.
One interesting business move we've seen this past year has been Bank-owned credit card issuers flooding the market with 0% promo credit card offers until 2007 & now 2008 for purchases AND transfers. This is inexplicable with FF at 5.25% & even more inexplicable considering personal debt. I think the repeal of Glass-Steagall changed finance. I also think a low ten year Treasury yield no longer signifies anything other than enormous liquidity & lengthened demands of managers trying to set duration for our aging boomers.
calmo, I actually forget the cost to refinance, I was just basing that on the higher interest rate, assuming all th eraise in interest payments is attributable to whatever cash was taken out.
Let's say someone had a $300,000 7% loan, refinanced to $330,000 at 7.37% to cash out $30,000. They are essentially paying whatever refinancing costs, say $1,500, as points. So this person paid 5 points for the privilege of taking out a 10.7% loan on $30,000, or you could say they borrowed $28,500 at 11.25%.
I guess it beats most credit card rates.
Bailey,
Homeowners planning to extract equity in the fabled OC better move quickly:
As buyers balk, builders carry on | market, housing, condos - Business - The Orange County Register
refinancing can happen with little cost to the borrower but a small fee for the reset if they stay with the same lender. i'm hearing many refinancing due to the low fixed rates. right now you can get 6 to 6.125% on a 30-year fixed with no points and a small application fee. these continual low rates will keep the boat afloat a bit longer but won't provide the stimulus to move the market higher.
I'm shocked that people are refinancing with increasing the rate! It seems like a horrible desision to me. I would never even think that such numbers are possible. I would say rather people are getting out of the ARM loans that had reset into new round of ARM's. But increasing the rate....
Holy moly...
Thanks for that link and esp to the graph, QUARTERLY REFINANCE STATISTICS, Tanta. So it looks we're down to the those thrifty Mennonites (5%) who actually apply for a smaller loan. And how unusual is that little trickle? The table says plenty!
I'm not an economist and I haven't had the time to do a ton of research, so please feel free to blow holes in the following argument.
Long-term rates have fallen recently, and smart folks are choosing to get out of their ARM while there is still time...even if it costs more to do so. M2 is still increasing. My guess is that at this stage of the game(their comments to the contrary), the FED realizes how devastating the higher rates/lower housing prices/foreclosure death spiral would be. So, they are busy using open market operations to monetize treasury debt. They have to be buying bonds right now. This would drive up the price and reduce the rate. I imagine they figure they have to save as many ARM holders as they can before this monetization sparks inflation and they are forced to do the opposite to contain it.
Problem is, this risky play is not going to solve the current housing supply and demand issue. Housing prices are still going to drop regardless of anything the FED does at this point. So, rather than losing their house to foreclosure, folks will sit for years owning much more than the house is worth, but able to make the payments due to a low fixed rate.
This risky play all falls apart if there is some economic shock that moves us into recession and people lose their house through job loss.
In my opinion, the FED is making a major riverboat gamble. My money is still on the a 2007 recession blowing down this house of cards.
Does anyone know the total dollar amount of 06 refi? This is the figure that would give us some idea of the 06 mgt debt load.
The other refi thing that happens is that people restart the clock on their mortgage, at least if they're using an ammortizing loan. If they last refi'd in 2003 they're adding 3 years of payments. If you refi every 1-2 years, you never reach the point where you're paying more principal than interest.
George, You've nailed my concerns. I agree, I can't imagine any scenario where prices will go higher from here, incomes are just TOO far behind. Housing prices WILL revert to their long-term mean growth rate, the question is, over what period of time?
I don't know if the FED's been BUYING the 10 year in open market. Limited supply coupled with increased institutional demand for longer duration might be one explanation for what we're seeing. But, I see NOTHING to stop lenders from continuing to lend if they see it's in their best interest. And, this would slow down how fast the sector returns to Earth. (IMO, this looks exactly like what we've been seeing with credit cards. Issuers jacked up all those "hooked" borrowers to 20%+ int.rates & are now "helping" these debtors work off their unmanagable debt loads - lest they decide to just walk away.) Of course, over the long-term this is a no-win policy. But, it's not outlandish to expect this Administration & the FED to consort to try ANOTHER stall tactic. If it keeps us from spiraling into our worst economic disaster of all times for just the next two years, I've no doubt they'd call it a tremendous success. Let the next President deal with it.
A riverboat gamble? I think you're being extremely kind. Have a nice day.
"i'm hearing many refinancing due to the low fixed rates. right now you can get 6 to 6.125% on a 30-year fixed with no points and a small application fee."
Refinancing out of ARMs perhaps. But I would think that most people who are in fixed rate mortgages, already moved while rates were under 6%.
Given today's poor retail sales figures, does anyone have thoughts on where that money is going, if not to fuel consumer spending?
Are we now collectively treading water? If so, what happens when available equity is tapped out?
payoff credit card debt has been a part of the RE ATM business. Its possible that many who did a refi in 03-04 ran up significant new credit card debt and did a recent refi to bring those down. I read recently that the refi business had significantly depleted the quality of the credit card business with the worst credit scores now having being the bulk of the business.
Just a guess that as the refi business slows, credit card transactions and debt will increase.
M2 is still increasing. My guess is that at this stage of the game(their comments to the contrary), the FED realizes how devastating the higher rates/lower housing prices/foreclosure death spiral would be. So, they are busy using open market operations to monetize treasury debt. They have to be buying bonds right now.
I've thought similar thoughts - that the Fed is in the market - though like Bailey I'm not sure they are buying the long bond... But liquidity is still flowing in from somewhere... so where is it coming from? There has to be finger prints left somewhere.
Anyone?
Dryfly, Been wondering this for on to two years now. We know Treasury reduced duration of its issuance & replaced some of longer security issuence with TIPS. We know they've forwarded opinions to institutional investors encouraging them to better match purchases to longer term liabilities (their retirement clients.) We also know the 10 year is a favorite tool of Hedge Funds, that fixed Mtgs. are tied to it, & fx Gov'ts also like it. I don't KNOW who the buyers are, but I don't expect it's the FED, YET. It's a great question because the size of our debt, leveraging & risk seems too unreal to even discuss.
Hey Bob, nice article. Meanwhile, i also found out something interesting on bills.com:
Home Loan Tips: Avoid Mortgage Troubles, Other Pangs of Rising Interest Rates.
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