The limbo dance of mortgage rates has been the silver lining of the recession. Well into the next boom, households will still be saving thousands of dollars because they shaved a point or more off the interest rate tied to their biggest debt. Lately those savings have helped stabilize the moribund economy. When homeowners refinance, they usually lower their monthly payment, freeing up cash to spend in other ways. And during the recent refi boom, 45 percent of customers did a “cash-out refinancing,” in which they borrowed more against the increased value of their home. During 2001 and the first half of 2002, cash-outs put $131.6 billion into homeowner’s pockets, according to the Federal Reserve. Mark Zandi of Economy.com credits refis with creating one fifth of the nation’s economic growth since 2000. But if the economy hasn’t strengthened by the time the trend ebbs, it could cause problems. Says Randell E. Moore, editor of Blue Chip Economic Indicators: “The big question is if the refinancing boom slows down, how much less money will people have to continue their pace of spending?”
The mortgage industry’s big players say they’re prepared to weather a slowdown. Even if refi volumes fall, strong home sales should power the industry to its third best year on record. Bank of America will soon launch a $50 million ad campaign (its biggest ever) to lure in new borrowers. Wells Fargo is pushing new “home asset management accounts,” which combine a mortgage with a home equity line that automatically increases each year. Just as stockbrokers diversified by shifting from simply selling stocks to crafting financial plans, mortgage lenders are beginning to position themselves as all-around debt counselors, who help clients deploy the equity in their homes.
There’s widespread optimism that a refi bust won’t kick the legs out from under the economic recovery, either. Most forecasters expect growth to pick up smartly later this year, assuming a war with Iraq ends quickly. If those predictions come true, business spending and newly hired workers will pump more cash into the economy, taking the place of the refi windfalls. And even though millions of homeowners have already locked in a low mortgage rate, don’t underestimate the power of procrastination. Joe and Misty Fridkin began talking about refinancing the mortgage on their Kansas City, Mo., home last July, but didn’t actually close until December. “It took us a little while to get our act together,” Joe says. They cashed out $20,000 of equity, using most of the money to repay higher interest debts. But this spring they’ll spend $7,000 on a new deck and a paint job for the house. That pattern is typical, says Economy.com’s Zandi. “Even if the refinancing spigot turned off today, the cash that’s already out there would continue to support spending for at least a few months.”
The end of the refi boom becomes a big problem only if rosy predictions of a post-Iraq economic recovery don’t come true. Even then, some pros see a glass half full. If the economy really tanks, mortgage rates could go even lower, repeating this virtuous cycle. “If rates were to go to 5.25 percent, everybody would refinance again,” says Sterling Edmunds, president of SunTrust Mortgage. Homeowners have had two years of fun watching rates play how-low-can-you-go. But for the sake of the economy, let’s hope we’ve seen bottom.
