Home Mortgage Refinance and Wealth Accumulation American Housing Survey User Conference Washington, DC March 8, 2011 Frank E. Nothaft and Yan Chang Freddie Mac
1 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
2 Mortgage Rate Negatively Correlated with Refi Share Refinance Share of Applications (Percent) Boom Boom 1998 Boom Source: Freddie Mac’s Primary Mortgage Market Survey ® Housing Downturn 30-Year FRM Rate (Percent) Refinance Share FRM Rate
3 Cash-Out Refi Share High When Refi Share Is Low Refinance Share of Applications (Percent) Boom Boom 1998 Boom Source: Freddie Mac’s Primary Mortgage Market Survey ® Housing Downturn Cash-Out Share Refi Share
4 Cash-out Volume Tripled from 2002 to 2006 Source: Freddie Mac Equity Extracted through Refinance of Prime, First Lien Mortgages (Billions of Dollars)
5 Methodology Use Consecutive American Housing Survey to Identify Refinances 5 high refi activity periods included In addition, and 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
6 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 $10,000 Identify 2 nd lien placements If a second mortgage is reported in later survey but not earlier If the origination date of the second lien in later survey post-dates previous survey and with larger balance
7 AHS Sample Shows Similar Trend in Refi and Cash-Out Refi Shares Share of Homes with Mortgages
8 Author-Identified Refi Cases Similar to Those Identified by AHS ( ) Matched Surveys Identified as Refi by AHS (?) YesNo Identified as Refi (?) Yes2, No501, Identified as Refi (?) Yes2, No1901, Identified as Refi (?) Yes No292,103
9 Share of African-American Borrowers Is Higher in Those Who Did Not Refi African American Borrowers as a Percentage of All Borrowers (Percent)
10 Share of First-Time Homebuyers Is Higher in Those Who Did Not Refi First-Time Homebuyers as a Percentage of All Borrowers (Percent)
11 Average Loan Balance Is Higher in Those Who Refinanced Average Loan Balance ($, adjusted to 2007 amount by CPI)
12 House Price Increases Drive Refi and Cash-Out Coefficient on House Price Increase Indicator
13 Interest Rate Reduction Drives Refi Coefficient on Interest Rate Reduction Indicator
14 Higher-Income Borrowers More Likely to Refi Coefficient on Income
15 Highest and Lowest Income Categories Exhibit Largest Impact on Refi Propensity Coefficient on Income Categories (% of Area MFI) Refi Cash-Out Take Out 2 nd Lien
16 Borrowers with Higher Educational Attainment More Likely to Refi Coefficient on Education
17 Minority Borrowers Less Likely to Refi Coefficient on Minority Borrower for Refi Probability
18 Minority Borrowers Less Likely to Refi Odds Ratios for Refi Probability Relative to Non-Hispanic White Borrowers
19 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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