Declining home values cut the amount of cash that homeowners were able to eke out of refinancing deals by nearly half during the second quarter, mortgage giant Freddie Mac (FRE) said Thursday.
While the share of Freddie's mortgages that were cash-out refinances was lower than it has been in over three years, homeowners still benefited from lower mortgage rates, which declined sharply during the period. Consumers cut their coupon rate by about half a percentage point, on average. Half of the borrowers lowered it by about 7.5%.
Although mortgage rates declined for much of the year, they are now
. The housing market continues to take turns for the worse, with drooping property values, sales and new construction. More borrowers have become delinquent or defaulted on their mortgages, making lenders wary about whom they lend to and how much they lend.
In cash-out refinances, homeowners replace their mortgages with a new loan that has a higher value, and pocket the difference. For instance, if you have a $100,000 balance on a mortgage, you might refinance for a $125,000 loan and use the $25,000 in cash for other purposes. Preferably, the new mortgage comes with a lower interest rate.
In total, about $38 billion in home equity was cashed out in refinance deals for conventional loans made to prime borrowers, Freddie said. That figure compares with $79 billion during the same period a year ago. About $68 billion was cashed out during the first six months of the year, the lowest level since the same period four years ago.
About 9% of Freddie's customers were able to reduce loan balances -- the largest cash-in share since the summer of 2005. Freddie Mac Chief Economist Frank Nothaft says the trend reflects "more cautious underwriting by lenders," who required customers to pay down some of their loans before offering a lower rate.
Freddie Mac and its counterpart
are government-sponsored mortgage lenders that own or insure almost half of the $12 trillion U.S. residential mortgage market, according to
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