Economy floats on refinancing

"Consumer spending from cash taken out from refinancings might have been the only factor in keeping the economy from a negative growth rate" this year, said Doug Duncan, chief economist with the Mortgage Bankers Association of America.

The way things are going, 2001 could be a record year for home refinancings, said David Berson, chief economist for Fannie Mae, the nation's largest source of home-purchase funding. He estimated that $770 billion in mortgages will be refinanced as borrowers trade short term, high-interest debt for long-term, low-interest debt.

The record for refinancing was set in 1998, when mortgage rates dipped even lower than this year-to around 6.5 percent-and consumers refinanced $750 billion in mortgages.

So far this year, nearly half of all mortgage applications were for refinancings, according to the mortgage bankers group. And that pace might be picking up. Their latest survey (for the week ended Aug. 24) showed that refinancing activity represented almost 54 percent of all applications, up from just under 5 0 percent the previous week.

Joe Doyle, president of TCF Mortgage in Minneapolis, said that healthy home appreciation rates over the past few years have made it possible for people who bought their houses just a couple of years ago to refinance. Some are walking away with $30,000, $40,000 and even $50,000 to spend.

He said that two weeks ago, 57 percent of all mortgages issued at TCF were refinancings. Most-about 70 percent-are pulling out cash in the deals.

Very few people were refinancing only for a better rate or term, he said. "Most are taking out money."

Keith Liuzzi and his wife, Diana Cumming, just refinanced the mortgage on their house in Minneapolis. They went from a 30-year mortgage at 8 1/2 percent to a 15-year mortgage at 6 7/ 8'

Liuzzi, a Minneapolis music teacher, said they also got about $20,000 in cash to paint their house and put on a new roof. Their monthly payment went up about $100 and their mortgage amount increased to $65,000, but their mortgage will be paid off sooner.

"That interest rate just went low enough, and I said now is the time," Liuzzi said.

Duncan of the Mortgage Bankers Association said that every refinancing boom has a theme. In 1993 it was people refinancing from higher interest rates. In 1998 it was a shift from adjustable-rate and 30-year mortgages to shorter-term, lower-rate ones.

General contractor David Styba and drafter/designer Susan Groth checked dimensions last week outside the 1919 bungalow of Huy Pham, left, and Jolee Mosher, right, in the Longfellow neighborhood of Minneapolis.

"It's amazing how many people are doing this," said Doug Winter, an area manager with Wells Fargo Home Mortgage. "People are taking advantage of lower rates to pay off higher rates for credit cards."

Most are using the proceeds to consolidate debt, whether it's credit cards, credit lines or car loans, Winter said.

He recently worked with a client who had a $12 1,000 mortgage, a $12,000 second mortgage and some credit card debt. He combined both mortgages, which carried higher interest rates than are available now, and was able to pull out $18,000 for home improvements. The new mortgage balance is significantly higher, $154,000, but the term was cut to 15 years to avoid paying more interest.

Before the refinancing, the client's monthly payments were $1,718; now the total is $1,341, providing $377 more free cash each month.

Soterios Stavrou said that he went from a 9.5 percent rate to 6.75 percent on a 30-year mortgage and was able to pull out about $25,000 to consolidate debt, some of which had accumulated on house projects. The money also helped pay for a new roof, new appliances and carpeting.

"We have a son in college, and when that is done then we have some home improvements," Stavrou said. "Two hundred dollars doesn't sound like much, but it adds up after a while,"

Many are using the money for house projects and as a result are funneling money back into the economy by keeping contractors and building supply manufacturers busy.

Jolee Mosher and Huy Pham are getting a new second level on their south Minneapolis house, which earned them almost $ 100,000 in equity in just four years.

They're refinancing their first and second mortgages and are borrowing a little extra to do the project, which will double the size of their 1919 bungalow in the Longfellow neighborhood.

Mosher, who teaches English as a second language, said that by refinancing and spending about $70,000 on the remodeling, their mortgage payment will increase about $500 a month, but they'll have more room for their family.

Berson, the Fannie Mae economist, said he expects consumers like Mosher, Liuzzi and Satrou to pump a record $40 billion in home equity back into the economy this year.

"We've had such strong home value gains and people are taking advantage of that," Berson said.

The Mortgage Bankers Association said that more than half of all people who did cash-back refinancings during the first half of the year ended up with a loan greater than their original mortgage.

The money spent from that realized equity "has been fundamental to keeping the economy from slipping over into a recession," Duncan said.

He said that without all the consumer spending aided by home refinancing, the nation's economy would have posted the first negative GNP rate in several years this year. Consumer spending accounts for about two-thirds of all economic activity.

"Consumer spending numbers haven't dropped off as much as expected and that's why," he said.

He also speculates that debt consolidation from refinancing proceeds has kept credit card deliquencies low. In fact, the American Bankers Association recently reported a decline in credit card delinquencies, even though the unemployment rate continues to grow.

Tobias Madden, regional economist with the Federal Reserve Bank of Minneapolis, said the impact of refinancing on the state's economy can't be quantified, but there is a benefit from higher sales taxes. The mortgage companies benefit, too, as fees increase. Refinancing a mortgage can cost upwards of $3,000.

The losers are investors in mortgage-backed securities, who are likely to earn less money on their investments.

"There's no such thing as a free lunch," Madden said. "It has a positive impact on consumer spending, but you have to look at the costs as well."

On average, homeowners last year held a 54 percent equity stake in their homes; in 1952, the first year the data was collected, they held about 81 percent, according to a report from the Joint Center for Housing Studies of Harvard University.

Mark Duda, the research analyst who conducted the study, said that while refinancing can be good for the economy, homeowners have to be judicious about how much they borrow and how they spend it because the housing market-just like the stock market and other investments doesn't go up every year and can head down for a time.

"If you're spending irresponsibly on your credit cards, you're going to bum up all the equity in your home to pay them off," Duda said.

"And if the housing market takes a downturn or you lose your job, you're in worse shape then if you had just continued servicing your mortgage and paying your credit cards."