HELOC Abuse at twenty-six year low in 2012

Back in August of 2010, I noted that HELOC abuse had hit a record low. Since then, it has declined even further. A recent report from Fannie Mae puts mortgage equity withdrawal at a 26-year low. I guess when owners have no equity, it’s much harder to raid the piggy bank.

Our national economy has become completely dependent upon loan owners. What will it take for us to kick the habit?

85 Percent of Refinancing Homeowners Maintain or Reduce Mortgage Debt in Fourth Quarter: 26-Year High

Real Cash-Out Volume at 16-Year Low

MCLEAN, Va., Feb. 2, 2012 /PRNewswire/ — Freddie Mac (OTC: FMCC) released the results of its fourth quarter refinance analysis showing homeowners who refinance continue to strengthen their fiscal house. This release of the report also contains annual statistics on refinances for the ten largest metropolitan areas and four Census regions of the U.S.

News Facts

  • In the fourth quarter of 2011, 85 percent of homeowners who refinanced their first-lien home mortgage either maintained about the same loan amount or lowered their principal balance by paying-in additional money at the closing table, a 26-year high. Of these borrowers, 37 percent maintained about the same loan amount, and 49 percent of refinancing homeowners reduced their principal balance; this latter percentage reflecting “cash-in” borrowers was the highest in the 26-year history of the analysis.
  • “Cash-out” borrowers, those that increased their loan balance by at least five percent, represented 15 percent of all refinance loans, the lowest percentage in the 26 years of analysis; the average cash-out share during the 1985 to 2010 period was 46 percent.

Anecdotally, this makes sense. About 40% of the population are spenders by nature. If given the chance to take free money and spend it, about 40% will. The remainder are likely legitimate renovation projects funded by home equity that ostensibly add value.

  • The median interest rate reduction for a 30-year fixed-rate mortgage was about 1.4 percentage points, or a savings of about 26 percent in interest rate. Over the first year of the refinance loan life, the median borrower will save about $2,700 in interest payments on a $200,000 loan.
  • The net dollars of home equity converted to cash as part of a refinance, adjusted for inflation, was at the lowest level in 16 years (since the third quarter of 1995). In the fourth quarter, an estimated $5.5 billion in net home equity was cashed out during the refinance of conventional prime-credit home mortgages, down from $5.6 billion in the third quarter and substantially less than during the peak cash-out refinance volume of $83.7 billion during the second quarter of 2006.

From $83.7B to $5.6B is a 93% decline in mortgage equity withdrawal. Over the course of a year, that’s about $300B not being spent to stimulate the economy.

  • Among the refinanced loans in Freddie Mac’s analysis, the median value change of the collateral property was a negative 4 percent over the median prior loan life of almost four years. In comparison, the Freddie Mac House Price Index shows about a 23 percent decline in its U.S. series between September 2007 and September 2011. Thus, borrowers who refinanced in the fourth quarter owned homes that had held their value better than the average home, or may reflect value-enhancing improvements that owners had made to their homes during the intervening years.
  • Of the ten largest metropolitan areas, the share of “cash-out” borrowers has fallen in all areas, with Detroit and Miami experiencing the largest declines. The “cash-in” share was up sharply in the U.S. and in all ten large metropolitan areas. Median house values on refinance loans have declined in all ten areas, with the sharpest declines in Detroit and Miami.


Attributed to Frank Nothaft, Freddie Mac vice president and chief economist:

  • “The typical borrower who refinanced reduced their interest rate by about 1.4 percentage points. On a $200,000 loan, that translates into saving $2,700 in interest during the next 12 months.
  • “Savvy homeowners are taking advantage of some of the lowest fixed-rates in more than 60 years to lock in interest savings. Fixed-rate mortgage rates hit new lows during December, with 30-year product averaging 3.96 percent and 15-year averaging 3.25 percent that month, according to our Primary Mortgage Market Survey.”

Get the latest information from Freddie Mac’s Office of the Chief Economist on Twitter:@FreddieMac

Cash-out Refinance Analyses Information

These estimates come from a sample of properties on which Freddie Mac has funded two successive conventional, first-mortgage loans, and the latest loan is for refinance rather than for purchase. The analysis does not track the use of funds made available from these refinances. The analysis also does not track loans paid off in entirety, with no new loan placed.

Was HELOC abuse really that common? The chart above illustrates how bad it was. At the peak in 2006, an astounding 88% of all refinances had cash out exceeding 5% of the loan balance. Eighty-eight percent! And notice how our economy sputters after each flurry of mortgage equity withdrawal.