home mortgage refinance and wealth accumulation american housing survey user conference washington,...
TRANSCRIPT
Home Mortgage Refinance and Wealth Accumulation
American Housing Survey User Conference
Washington, DC
March 8, 2011
Frank E. Nothaft and Yan Chang
Freddie Mac
2
Motivation
Refinance as an instrument for household finance management
Rate-and-term refi Accumulates wealth Lowers default risk Allows better product match
Cash-out refi / Placement of second mortgages Smooth consumption Rebalancing portfolio Misuse increases default risk
3
Mortgage Rate Negatively Correlated with Refi Share
0
10
20
30
40
50
60
70
80
90
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
3
4
5
6
7
8
9
10
11
12Refinance Share of Applications (Percent)
1992-93Boom
2001-04Boom
1998Boom
Source: Freddie Mac’s Primary Mortgage Market Survey®
2006-Housing
Downturn
30-Year FRM Rate (Percent)
Refinance Share
FRM Rate
4
Cash-Out Refi Share High When Refi Share Is Low
0
10
20
30
40
50
60
70
80
90
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
Refinance Share of Applications (Percent)
1992-93Boom
2001-04Boom
1998Boom
Source: Freddie Mac’s Primary Mortgage Market Survey®
2006-Housing
Downturn
Cash-Out Share
Refi Share
5
Cash-out Volume Tripled from 2002 to 2006
0
50
100
150
200
250
300
350
'93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10
Source: Freddie Mac
Equity Extracted through Refinance of Prime, First Lien Mortgages (Billions of Dollars)
6
Methodology
Use Consecutive American Housing Survey to Identify Refinances 5 high refi activity periods included In addition, 2005-2007 and 2007-2009 represent the most recent housing
cycle
Questions Is the refinance decision correlated with market conditions Who refinanced and who didn’t How the refi pattern changes through time
Advantage Full market view Rich borrower characteristics
Limitations Self-reported house price and mortgage information Survey questions, definitions change over the years
7
Methodology
Limit sample to same unit, same household, same reported move-in date in consecutive surveys, mortgage characteristics non missing in both years, mortgage origination date in later survey no earlier than previous survey
Identify refi cases If reported origination date in later survey post-dates previous survey; Or, if reported origination year is the same,
If loan balance different by more than $5,000; or If interest rate different by more than 0.4 percentage points
Identify cash-out refi cases If a second mortgage is reported in later survey but not earlier If total loan balance increase by more than $10,000
Identify 2nd lien placements If a second mortgage is reported in later survey but not earlier If the origination date of the second lien in later survey post-dates previous
survey and with larger balance
8
AHS Sample Shows Similar Trend in Refi and Cash-Out Refi Shares
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
1985-1987 1991-1993 1997-1999 2001-2003 2003-2005 2005-2007 2007-2009
Refi Cash-Out Refi Add 2nd
Share of Homes with Mortgages
9
Author-Identified Refi Cases Similar to Those Identified by AHS (2003-2007)
Matched Surveys
Identified as Refi by AHS (?)
Yes No
2001-2003 Identified as Refi (?)
Yes 2,278 259
No 50 1,757
2003-2005 Identified as Refi (?)
Yes 2,035 230
No 190 1,788
2005-2007 Identified as Refi (?)
Yes 498 173
No 29 2,103
10
Share of African-American Borrowers Is Higher in Those Who Did Not Refi
0
0.01
0.02
0.03
0.04
0.05
0.06
0.07
0.08
1985-1987 1991-1993 1997-1999 2001-2003 2003-2005 2005-2007 2007-2009 AllPeriods
Did Not Refi Refinanced
African American Borrowers as a Percentage of All Borrowers (Percent)
11
Share of First-Time Homebuyers Is Higher in Those Who Did Not Refi
0.3
0.32
0.34
0.36
0.38
0.4
0.42
0.44
0.46
0.48
1985-1987 1991-1993 1997-1999 2001-2003 2003-2005 2005-2007 2007-2009 AllPeriods
Did Not Refi Refinanced
First-Time Homebuyers as a Percentage of All Borrowers (Percent)
12
Average Loan Balance Is Higher in Those Who Refinanced
0
20,000
40,000
60,000
80,000
100,000
120,000
140,000
160,000
180,000
200,000
1985-1987
1991-1993
1997-1999
2001-2003
2003-2005
2005-2007
2007-2009
AllPeriods
Did Not Refi Refinanced
Average Loan Balance ($, adjusted to 2007 amount by CPI)
13
House Price Increases Drive Refi and Cash-Out
-0.3
-0.2
-0.1
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
Refi Cash-out Additional 2nd
85-87 93-95 97-99 01-03
03-05 05-07 07-09
Coefficient on House Price Increase Indicator
14
Interest Rate Reduction Drives Refi
-1
-0.5
0
0.5
1
1.5
2
2.5
Refi Cash-out Additional 2nd
85-87 93-95 97-99 01-03
03-05 05-07 07-09
Coefficient on Interest Rate Reduction Indicator
15
Higher-Income Borrowers More Likely to Refi
-0.05
0
0.05
0.1
0.15
0.2
0.25
0.3
Refi Cash-out Additional 2nd
85-87 93-95 97-99 01-03
03-05 05-07 07-09
Coefficient on Income
16
Highest and Lowest Income Categories Exhibit Largest Impact on Refi Propensity
-1
-0.5
0
0.5
1
1.5
<80% 80-120% 120-160% 160-200% >=200%
85-87 93-95 97-99 01-03
03-05 05-07 07-09
Coefficient on Income Categories (% of Area MFI)
-1.5
-1
-0.5
0
0.5
1
1.5
2
2.5
<80% 80-120% 120-160% 160-200% >=200%
85-87 93-95 97-99 01-03
03-05 05-07 07-09
-1.5
-1
-0.5
0
0.5
1
1.5
2
<80% 80-120% 120-160% 160-200% >=200%
85-87 93-95 97-99 01-03
03-05 05-07 07-09
Refi Cash-Out
Take Out 2nd Lien
17
Borrowers with Higher Educational Attainment More Likely to Refi
-0.15
-0.1
-0.05
0
0.05
0.1
0.15
Refi Cash-out Additional 2nd
85-87 93-95 97-99 01-03
03-05 05-07 07-09
Coefficient on Education
18
Minority Borrowers Less Likely to Refi
-1.5
-1
-0.5
0
0.5
1
African-American Other Minority
85-87 93-95 97-99 01-03
03-05 05-07 07-09 All
Coefficient on Minority Borrower for Refi Probability
19
Minority Borrowers Less Likely to Refi
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1
African-American Other Minority
85-87 93-95 97-99 01-03
03-05 05-07 07-09 All
Odds Ratios for Refi Probability Relative to Non-Hispanic White Borrowers
20
Conclusions
House price increases and interest rate reduction are highly correlated with refinance probabilities
Refinance cases during ’05-’07 not significantly tied to rate reductions
Borrowers with different characteristics show different propensity for refinance
Cost to borrower welfare can be large for missed refinance opportunities
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Opinions, estimates, forecasts and other views contained in this document are those of the authors, do not necessarily represent the views of Freddie Mac or its management, should not be construed as indicating Freddie Mac's business prospects or expected results, and are subject to change without notice. Although the Office of the Chief Economist attempts to provide reliable, useful information, it does not guarantee that the information is accurate, current or suitable for any particular purpose.
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