In spite of declining house prices and tightening credit, Americans are continuing to pull cash out of their homes according to Freddie Mac's Cash-Out Refinance Report for the fourth quarter of 2007, but in fewer numbers and much lower amounts than recorded even one quarter earlier.

81 percent of Freddie Mac-owned loans that were refinanced during that quarter resulted in new mortgages that were at least 5 percent higher than the mortgages they replaced. During the third quarter 86 percent of refinances could be termed "cash-out."

The actual amount of money pulled out of home equity, however, declined more sharply between the third and fourth quarters. In the former $58.3 billion was cashed out while in the October-December period in 2007 $37.8 million was pocketed by homeowners refinancing their homes. This was less than half the amount cashed out in the fourth quarter of 2006.

The report also revealed that the homes that were refinanced during the fourth quarter had a median appreciation of 21 percent since the previous mortgage was signed, down from a revised 25 percent in the third quarter 2007. New loans were replacing original loans with a median age of 3.8 years, one month older than the median age of loans refinanced during the second quarter of 2007.

The median ratio of the new-to-old interest rate was 1.04; i.e. one-half of those new loans were at a first mortgage coupon rate that was 4 percent or less higher than the old loan which translates into an increase in the coupon rate of less than an eighth of a percentage point at today's level of 30-year fixed mortgage rates.

Amy Crews Cutts, Freddie Mac deputy chief economist said, "This is real evidence of the upset in the mortgage credit markets as well as the impact of the decline in home values that occurred late in the year. The total effect on home equity withdrawal is deeper than we document with our Cash-Out Refinance Report because at the same time that lenders tightened standards on their prime first mortgages, which is what we have recorded, many of them withdrew from the home-equity lending market or greatly tightened their criteria for new home equity loans. The Federal Reserve's Senior Loan Officer Survey reported that more than 67 percent of large banks tightened lending standards for revolving home equity loans of credit."

Frank Nothaft, Freddie Mac vice president and chief economist said that "...rates on jumbo mortgages for prime borrowers became relatively much more expensive compared to conforming rates, averaging 7.1 percent for 30-year fixed-rate loans in December, about a full percentage point above rates on a comparable conforming product. These higher rates on jumbo loans put a damper on refinance activity and reduced the overall volume of originations.

Nofhaft said that while home owners hold a very large amount of equity in their homes, this equity cushion is eroding. "According to the Federal Reserve Board of Governors, total owner's equity in household real estate fell by $160 billion between the first quarter of 2007 and the third quarter (the most recent quarter available), to $10.58 trillion. Research conducted by Fed economists suggests that consumers are more sensitive to changes in their home equity wealth than to changes in stock market wealth, and thus this decline in aggregate home equity is likely to have a dampening effect on consumer spending independent of the volume of equity that homeowners convert into cash."

Data for this report came from a sample of properties on which Freddie Mac has funded at least two successive loans and are screened to verify that funds are a refinance rather than for home purchase.