> Columnist Kenneth Harney
Refi Boom Equity Cashouts Were Good For The Economy, Great For Homeowners
by Kenneth R. Harney
Billions of dollars worth of equity cashouts by homeowners during the refi boom of 2001-2003 not only helped the U.S. economy, concludes a new federal study, but they were smart financial moves for the individual homeowners themselves. An unprecedented $5 trillion worth of American home mortgages were refinanced during the boom years, according to a study by three economists at the Federal Reserve Bank of New York. Hundreds of billions of dollars were also cashed out by homeowners as part of their refinancings -- at an annualized rate that hit $450 billion of equity conversions in mid-2003. But those cashout dollars were handled responsibly, says the study by Margaret McConnell, Richard Peach and Alex Al-Haschimi. Rather than simply blowing their equity largesse on consumer spending -- new cars, appliances, vacations and the like -- they were plowed back heavily into home improvements, financial investments and purchases of additional real estate. Equally important, the researchers found, homeowners used part of their cashout proceeds to pay off high-cost consumer debts and to lower their overall household debt burdens. Even though some analysts feared that the refi boom could leave homeowners and their houses hocked in debt to the rafters, the reverse appears to be the case, according to the New York Fed study. "We find that this period of unprecedented home equity extraction has (led to) a slowing in the rate of increase of nonmortgage household liabilities, an increase in the personal savings rate, and a reduction ... in household debt burdens relative to disposable income." During 2001-2002, the study reports, 35 percent of the dollars produced by cashouts were spent on home remodelings and other home-related capital projects. Another 26 percent went to reduce or payoff existing household consumer debts such as credit card balances -- essentially replacing high-cost unsecured debt with tax-subsidized, low-cost mortgage debt. Consumer goods accounted for only 16 percent of cashout expenditures, while purchases of stocks and other financial instruments accounted for 11 percent. One out of every ten refi cashout dollars went towards a purchase of additional real estate -- vacation property, second or third homes, or income-earning investment real estate. "The picture that emerges," say the study authors, "is one of financial prudence rather than profligacy." Homeowners took their liquified equity dollars and strengthened their personal economics. "Many analysts have expressed concern that the surge of home equity withdrawals has put consumers in a precarious financial position that will hinder their ability to spend once the refinancing boom comes to an end. Our findings suggest just the opposite. Consumers have chosen to finance a moderate pace of spending with mortgage debt priced at historically low interest rates while at the same time increasing their acquisition of financial assets." The bottom line: All you homeowners out there did the right thing during the great boom years of 2001-2003. But what about right now? Are you making the most of the latest twist in the refi boom story? Rates are back to near-historic lows, with fixed 30-year rates in the 5.6 percent range, 15-year fixed rates below 5 percent, and one year ARMs in the mid to upper 3 percent range. Even if you refinanced last summer, you could be a candidate for a another refi today, says Freddie Mac's chief economist, Frank Nothaft. Wall Street analysts say anywhere from 40 to 48 percent of all homeowners have mortgages with note rates that are ripe for refinancing at current rates. Maybe the refi boom -- and attendant smart economic moves by American homeowners -- aren't quite done yet. | 
