Cash-out Refi Party Not Over Yet
From Inman News:
Freddie Mac: Cash-out refis up in first quarter
In the first quarter of 2006, 88 percent of Freddie Mac-owned loans that were refinanced resulted in new mortgages with loan amounts that were at least 5 percent higher than the original mortgage balances, according to Freddie Mac's quarterly refinance review.
This percentage is up from the fourth quarter of 2005, when the share of refinanced loans that took cash out was a revised 81 percent, and is the highest since the third quarter of 1990, the mortgage giant said.
"The share of all mortgages that were for refinance fell slightly in the first quarter of 2006 to 44 percent from 45 percent in the fourth quarter of 2005. Over that same period interest rates on all mortgages increased between 0.02 and 0.25 percent," said Frank Nothaft, Freddie Mac vice president and chief economist.
"Almost no one is refinancing to reduce their interest rate in today's environment. In fact, the first quarter of 2006 is the first time in 20 quarters in which the new mortgage rate was higher than the old one for more than half of refinancing borrowers," Nothaft said.
...
"Total mortgage originations were down in the first quarter by an estimated 24 percent, but the strong overall refinance share along with the very high proportion of borrowers who extracted equity through refinance led to an extraction of home equity through prime first-lien refinances of $59.6 billion in the first quarter," Cutts said.
"This volume is down only 16 percent from the fourth quarter of 2005's revised equity extraction volume of $70.9 billion. We expect the share of all refinance borrowers who take out cash to remain high in 2006, but as mortgage rates continue to climb, the refinance share should drop to around 33 percent," Cutts said.
Freddie Mac: Cash-out refis up in first quarter
In the first quarter of 2006, 88 percent of Freddie Mac-owned loans that were refinanced resulted in new mortgages with loan amounts that were at least 5 percent higher than the original mortgage balances, according to Freddie Mac's quarterly refinance review.
This percentage is up from the fourth quarter of 2005, when the share of refinanced loans that took cash out was a revised 81 percent, and is the highest since the third quarter of 1990, the mortgage giant said.
"The share of all mortgages that were for refinance fell slightly in the first quarter of 2006 to 44 percent from 45 percent in the fourth quarter of 2005. Over that same period interest rates on all mortgages increased between 0.02 and 0.25 percent," said Frank Nothaft, Freddie Mac vice president and chief economist.
"Almost no one is refinancing to reduce their interest rate in today's environment. In fact, the first quarter of 2006 is the first time in 20 quarters in which the new mortgage rate was higher than the old one for more than half of refinancing borrowers," Nothaft said.
...
"Total mortgage originations were down in the first quarter by an estimated 24 percent, but the strong overall refinance share along with the very high proportion of borrowers who extracted equity through refinance led to an extraction of home equity through prime first-lien refinances of $59.6 billion in the first quarter," Cutts said.
"This volume is down only 16 percent from the fourth quarter of 2005's revised equity extraction volume of $70.9 billion. We expect the share of all refinance borrowers who take out cash to remain high in 2006, but as mortgage rates continue to climb, the refinance share should drop to around 33 percent," Cutts said.
14 Comments:
Richard - That would be called renting.
Except renting is thousands less a month and has no financial risk.
Indentured servitude
From CNN Money:
Ameriquest to cut 3,800 jobs
Capital Holdings said it will cut 3,800 jobs at its Ameriquest mortgage unit and close 229 branches as part of an effort to centralize its retail network.
"We are moving strategically and decisively to remain a leader in an industry that is undergoing fundamental changes," Aseem Mital, chief executive of ACH, said in a statement.
...
The closure of Ameriquest branches are effective immediately, but Ameriquest will continue to lend nationwide through ACH's existing regional production centers, the statement said.
I did not think any equity was left for extraction.
Desperation and insanity running wild last several years.
Fools are starting to really believe they a really financially well off cuz the mortgage banker or credit card company hands them gobbs of money.
are they in for a surprise.
No reactions to the Ameriquest announcement?
grim
RentinginNJ said...
You’re telling me that people are giving up lower rates in order to cash out equity?
4:44 PM
Not bad, huh? or duh as the case may be.
I'll tell you one better. The City of Hoboken had a budget shortfall a few years ago, so they refinanced an outstanding loan at an above market rate and were given cash to compensate for the difference. With the cash they plugged the hole in the budget. Meanwhile debt service cost went up dramatically.
Grim-
Here's my reaction to the Ameriquest announcement. Makes sense if your business is vanishing before your eyes. Does that leave any employees? Hoovers says they only have 4000 employees. If you take about about a dozen executives and say half a dozen assistants for them, you're left with about 180 employees to do the work?
These are the types of things we will see in the coming months. This will eventually lead to a consolidated lending market, higher fees, and more stringent loan requirements.
I keep asking Chicago which banks he thinks have high exposure in mortgages because I would look to them as potential nose divers as well. So, Chicago, any thoughts on which banks to keep an eye on?
JM
JM:
Note from last JULY
Investors Fret Mortgage Balloons Will Burst
By JESSE EISINGER
Wall Street Journal July 27, 2005; Page C1
There has been plenty of talk about a housing bubble, but very little about a mortgage bubble.
Now investors are starting to see worrisome signs in some banks' latest quarterly earnings reports. In others, such signs are absent. Good news? Nope, because disclosure is so poor at so many banks.
As home prices have soared, banks have been enticing customers with sweet-sounding mortgages that lower monthly payments, including interest-only loans. The most dangerous development is mortgages that offer payment options.
Typically, these so-called option adjustable-rate mortgages, or option ARMs, let customers choose how much to pay each month. They can make the standard principal-and-interest payment or pay just the interest. And then there's the even dicier option to make just a low minimum payment, as with a credit-card bill.
The catch is that the unpaid portion of the interest gets tacked onto the principal -- a "negative amortization" that increases the size of the mortgage. Left with more debt, the customer is more vulnerable to rising rates.
Publicly traded lenders with big exposure to these products include Countrywide and Washington Mutual and smaller California banks such as Downey, First Fed and Indymac.
Some banks are lowering their credit standards, sometimes qualifying borrowers based on their ability to make the minimum nut, not whether they can afford the whole deal.
Option ARMs are wonderful not just for borrowers who can't afford their houses, but also for investors who look only superficially at a bank's earnings report. A bank books the entire amount that a customer owes as income each month, not the minimum payment that's actually paid. Voilà, noncash earnings.
It gets better: The unpaid interest gets tacked on to the bank's outstanding loan total, allowing the bank to display loan growth, which investors love. "You get earnings and growth. What more can you ask for?" says Keefe, Bruyette & Woods analyst Fred Cannon.
But there could be credit problems down the road. And at some point, it's plausible regulators might fret about the bank's capital.
Washington Mutual disclosed some aspects of its exposure for the first time this quarter, but left questions unanswered, says Mark Agah, analyst for independent research firm Portales Partners. It originated $19.6 billion of option ARMs in the second quarter, or 37% of its home-loan volume. WaMu didn't report the total amount of deferred interest beefing up its loan totals. Instead, it said option ARM borrowers' principal had grown by $26 million, or 0.04% of outstanding balances. That doesn't count all the deferred interest from borrowers who paid down their principal for a time but then started making minimum payments. Washington Mutual actively sells most of its option ARMs into the secondary market, but that market might not always be available on attractive terms.
A WaMu spokeswoman says in an email that the company is considering how best to disclose option ARM data.
Countrywide discloses even less. It says its second-quarter ARM volume was $67 billion, or 56% of its home-loan volume. But the company didn't disclose the percentage of option ARMs in its financial statements and doesn't disclose the amount of negative amortization. In response to questions from investors during its earning conference call yesterday, the bank said that 20% of its loan production this year has been option ARMs, at least 50% from California. Countrywide said on the call that it, too, planned to increase disclosure.
What should investors do? Problems won't come today or tomorrow, but don't look now: Rates, they are arisin', and that's when some borrowers will run out of options. At least investors still have some options left. Like reducing their exposure to mortgage banks.
JM:
just avoid the sector
DON'T SHORT!
A lot of data has already been priced in. People have been front running this for months. I'll make you a bet that it doesn't come out in the wash as bad as you are guessing.
Chicago,
Thanks for replying.
I'm more pessimistic about banks. I haven't done the heavy analytics. The growth just doesn't seem right for the retail side and I think that also goes for mortgages, HELOC's, refinancing, etc.
Check out this piece about a possible number of foreclosures on the market...
http://www.oftwominds.com/blogapr06/foreclosures2.html
It's conclusion is $500 billion in losses for banks/thrifts! Looking back through some of the articles chronicling the late 80's early 90's real estate bust, you'll see some similarities in the S&L's...
Oh, btw, I wasn't even thinking about shorting a bank stock, more just as a lagging indicator and a red flag for bank regulators to step in and return lending standards back to something more rational...
JM
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