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Each day the Research staff takes a look at recently released economic indicators, addressing what these indicators mean for REALTORS® and their clients. Today’s update discusses the 10-year Treasury and mortgage refinancing.
- The 10-year Treasury rate continues to hover around the 2.0% level on concerns over financial stability in Greece and Itally. The weakness of the 10-year Treasury will help to maintain an environoment of record low mortgage rates.
- Freddie Mac released its analysis of refinance activity during the 3rd quarter. Not surprising, the share of cash-out refinances has fallen sharply since the housing boom and now accounts for just 18% of refinances compared to 88% at its peak in the 3rd quarter of 2006.
- Borrowers are shoring up their financial positions by taking advantage of record low mortgage rates and paying down their mortgages when they refinance. The share of cash-in refinances was 37% in the 3rd quarter of this year compared to just 5% in the 3rd quarter of 2006, while the median reduction in rate for a 30-year fixed refinance was 1.2%.
- The report also noted that the median change in the value of the properties refinanced was 7% lower than at the inception of the loan and that the median age of the refinanced loan was roughly 5 years (4.8). Freddie Mac’s own price index fell 25% over this same time period (September of 2011 versus September of 2006) suggesting that those persons who experienced the sharpest declines in equity are not taking part in this refinance boom. Underwater borrowers must bring cash to the table or receive principle forgiveness in order to refinance. However, the FHFA’s Acting Director Ed DeMarco, who oversees the activities of both Freddie Mac and Fannie Mae, has stated that the cost savings while the two entities are in conservatorship take precedent to principle reductions. Academic studies have shown a relationship between a borrowers negative equity position and a 2nd event (e.g. loss of job, divorce, health issues) resulting in foreclosure.
- Cash-in refinances tend to increase as a share of all refinances during periods of slow or negative appreciation. This trend is a reflection of the slow healing process for homeowners after a slowdown or decline in home value appreciation and is necessary for achieving financial stability and improved consumer confidence. Structural impediments appear to be limiting refinances to those borrowers with more robust financial positions, though, what could amount to a missed opportunity to take advantage of historical mortgage rates.
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