Gary Siegel knows a thing or two about mortgage refinancing. Since buying a five-bedroom colonial home in Potomac, Md., in 1991, the Washington (D.C.) real estate attorney had refinanced three times before this summer. On Aug. 15, with mortgage rates at their lowest level in more than three decades, Siegel did it again: He cut the rate on his jumbo 30-year fixed mortgage from 7 1/8% to 6 5/8%. "Rates were the lowest I had ever seen," he marvels. "I saw a great opportunity."
Across the nation, homeowners like Siegel are jumping on the refinancing bandwagon, which is picking up the pace again after slowing earlier this year. Indeed, new home loans are expected to nearly match last year's record of about $2.03 trillion--with about half of that coming from refinancings. "2002 will be a blockbuster," says Bradley W. Blackwell, national sales manager at Wells Fargo Co.'s home-mortgage business.
That's good news for the U.S. economy, although some consumers risk burdening themselves with high levels of debt. With the average rate on a 30-year fixed mortgage having fallen to a record low of 6.2% by mid-August, many people are upping their mortgages and pulling equity out of their homes through so-called cash-out refinancings. Others are simply looking to lower their monthly payments. Either way, the net result is more money in people's pockets for shopping, investing, or paying down other debt. Without refinancings, says Mark M. Zandi, chief economist at economic researcher Economy.com Inc., "the recovery would arguably be in [more] jeopardy than it is."
With home values rising at an average annual rate of 7% nationwide, it's little surprise that most homeowners are using the refinancings to take some cash out of their houses. That's what Siegel, 43, did. While he now pays $500 more per month, he walked away with a check for nearly $100,000. David W. Berson, chief economist at mortgage lender Fannie Mae, estimates that some 60% of the cash-out funds will be spent--about the same as last year. Economy.com's Zandi figures cash-outs from refinancings this year will top $138 billion. That's a leap from the $100 billion of 2001, and it should add up to about 1.33% of the 2002 gross domestic product.
The refinancing boom is not without peril. If the economy deteriorates, unemployment rises, or home prices soften, homeowners who increase their mortgage amounts or monthly payments could be setting themselves up for trouble. That could lead to more mortgage delinquencies or defaults. "There are real risks [to cash-out refinancings] for some," says Diane C. Swonk, chief economist at Bank One Corp. in Chicago. "There's no free lunch."
For now, though, the infusion of cash from refis is giving the economy a short-term lift. Heather and Conrad Mulligan in Seattle refinanced and lowered their monthly payment by $300, money they will use to buy things for a new baby. For his part, Siegel plans to use half his check to pay down debt and plow the rest into real estate.
Refinancings also are spurring the home-improvement, residential-furnishing, and auto sectors. A Federal Reserve Board Study conducted in 1999 estimated that 33% of the money from cash-out refis goes into home improvement. One beneficiary of such splurging is the home-improvement chain Lowe's Cos., where second-quarter sales rose 22%, to $7.49 billion. And while incentives were largely responsible for the surge in new-car sales in July, economist Swonk says "the other part was refinancing activity. Refinancings are giving an extra stimulus to growth that many people had not counted on."
The question is when the refinancings will slow down. For the moment, mortgage brokers and economists say the refi rush shows no sign of waning. "Everyone I know in the industry is swamped," says Norman Stein, vice-president and Chicago area manager for Mortgage Services Inc. in Bloomington, Ill., where 65% of new loans these days are for refis. With economic recovery still sluggish and mortgage rates not expected to climb anytime soon, he is likely to remain busy for months to come.
By Stephanie Anderson Forest in Dallas, with Louise Lee in San Mateo, Calif., Roger O. Crockett in Chicago, and bureau reports
Get BusinessWeek directly on your desktop with our RSS feeds.
Add BusinessWeek news to your Web site with our headline feed.
Click to buy an e-print or reprint of a BusinessWeek or BusinessWeek Online story or video.
To subscribe online to BusinessWeek magazine, please click here.
Copyright 2002, Bloomberg L.P.
Printer-Friendly Version
