Thursday, October 11, 2012

Home Refinancing Boom Is Different This Time

U.S. home owners are refinancing their mortgages at the fastest clip since 2005, but the difference now is they are putting cash in, not taking it out.

At the going rate, 25 percent of all first-lien U.S. mortgages will be refinanced this year, according to LPS Applied Analytics. That represents about $7.1 billion —just through June of this year — in savings on monthly payments, according to economists at Freddie Mac, who ran the numbers for this report.

Seven years ago, refinancing wasn’t about saving on monthly payments; it was about pulling cash out. Homeowners extracted close to a trillion dollars collectively in home equity in 2005 and largely put it toward home remodeling, swimming pools, cars, vacations and retail spending.

Today, 81 percent of homeowners refinancing their first-lien mortgages either kept the same loan amount or lowered their principal balance by paying-in additional money at closing, according to Freddie Mac.

“The net dollars of home equity converted to cash as part of a refinance, adjusted for consumer-price inflation, was at the lowest level in 17 years,” the Freddie report notes. Rather than build debt, they reduced it. Refinances are surging this year, not just because interest rates are hitting new record lows but because the government is making severely underwater loans eligible for refinance

The Home Affordable Refinance Program, which involves loans backed by Fannie Mae and Freddie Mac, used to cap negative equity, but this year that cap was removed, putting thousands more loans into the refi machine. So far more than half a million loans were refinanced through HARP since the beginning of this year. 

Politicians and housing advocates claim that all the savings from these record low interest rates and the ensuing refinances is going back into the economy, but that does not appear to be the case.

Given the research from Freddie Mac, a quick, non-scientific survey of small lenders and brokers, produced similar findings:

Craig Strent - Maryland: Homeowners, particularly older ones that have already met their financial planning goals, are taking the savings and just putting it back in the loan, meaning they are lowering their rates, but continuing to pay the same amount on the new loan that they were paying on the previous loan. This accelerates their payoff and decreases the interest they pay, though arguably with an opportunity cost given how cheap the money is.

Dan Green - Ohio: Not all households are choosing to reduce payments. Many are choosing to reduce term. At today's rates, the first payment of a 15-year mortgage is comprised of 67 percent principal. To get that point on a 30-year mortgage would take 18 years. More homeowners are asking about amortization schedules, and the benefits of paying extra principal each month. There's more talk of saving than spending.

Julian Hebron - California: Refi to lower payment, but keep making previous payment to pay loan down faster. Example: If you use our average loan of $550,000 and super-conforming rates of 3.5 percent now vs. 4.5 percent a year ago, a borrower’s payment drops from $2,787 to $2,429 (this factors in the paydown of $550,000 to $541,000 over 12 months). If a borrower keeps making old payment on new loan, thereby paying loan down by an extra $358 per month, they cut 6 years (or 20 percent) off a 30-year term.

Suffice it to say, when it comes to home equity, we have fast become the anti-ATM society, by will or by force (we don’t have a whole lot of home equity anymore).

After trillions of dollars in lost home equity, Americans now appear to want it back so badly that they’re willing to pay it in themselves. They also want less debt for a shorter period of time.
This sounds like responsible, conservative fiscal planning, but it also means that savings from rock-bottom interest rates do not get paid back into the economy the way so many politicians and analysts have suggested. -By CNBC's Diana Olick

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