> Advice For Borrowers
Smart Refinancing Improves Household Finances
by Broderick Perkins
Indicating consumers are wiser than hand-wringing doom sayers gave them credit, a federal reserve bank study revealed refinancing consumers in recent years did the right thing with cash proceeds from refinanced home loans. The extended residential real estate mortgage refi-boom spawned by record low interest rates ushered in a host of warnings that consumers lured by fast appreciating home values, record low interest rates and easy-qualifying, 100 percent-or-more loans could refinance themselves -- and the economy -- right into the poor house. Home buying, equity borrowing and refinanced mortgages in recent years revealed a shift away from the stock market and other investments and toward the more tangible investment of shelter. That concerned some economists and consumer financial experts as the ranks of refinancing borrowers included homeowners boosting their mortgage debt to risky levels beyond the value of their home. "The current refinancing boom is interesting because it appears to represent a structural change in the economy," according to the Federal Reserve Bank Of San Francisco's "Economic Letter: Mortgage Refinancing" late last year. Apparently, those who went overboard with mortgage debt were the exception rather than the rule according to "After The Refinance Boom: Will Consumers Scale Back Their Spending?" by three economists at the Federal Reserve Bank of New York. The report says more than one out of every four homeowners refinanced mortgages in 2003 as consumer spending provided an important economic stimulus -- but not to the detriment of consumers who used cash-out proceeds wisely. "During this boom of mortgage refinancing and equity withdrawal, the pace of consumer spending remained consistent with prior periods; despite the availability of additional resources through refinancing and equity withdrawal, consumers did not spend a greater proportion of their disposable income on consumption," the report said. To the contrary, the report said, consumers slowed their rate of indebtedness, increased personal savings and increased their net worth. "As a result, households may be in a better position to spend in years ahead," the federal reserve bank reported. That's because, as financial experts advise, most refinancing consumers wisely used the money on debt consolidation or investments that provided a return on their money. The report said 51 percent used refinancing to consolidate debts, typically at lower cost thanks to cheaper interest rates. The federal reserve bank report also said 26 percent of consumers performed home improvements which can add value to the home. "A lot of people are doing consolidations and may be paying off equity lines they had that were interest only," said Larry Silvas with South Valley Mortgage Group in Hollister. "There is a large trend in this area to rehabilitate the property you have so you have a nice home and you don't have to pay the excess property taxes that come with purchasing a more expensive home," Silvas said. The trend is a national one reflected in the fallen demand for new originations on home mortgages, according to the Federal Reserve's January 2004 "Loan Officer Opinion Survey." The Fed's Board of Governors' survey found 40 percent of the 52 loan officers surveyed said new mortgage origination was either moderately or substantially weaker than it was three months ago. Slivas said refinancing, however, is holding steady. New York's federal reserve bank said another 25 percent used the money on consumer expenditures, including vehicle purchases, vacations and living expenses, but also education, which, unlike the other purchases provides a form of return. Also, the report said, 13 percent used refinancing cash out to make stock market and other financial investments and 7 percent used the money to invest in real estate or business. Silvas said tighter Fannie Mae underwriting rules last year allowed many borrowers to tap equity only up to 70 percent of the property value forcing homeowners to stay frugal and keep 30 percent of their equity intact. "Consumers have used their withdrawn home equity to restructure their balance sheets and reduce their debt service burdens. The picture that emerges is one of financial prudence rather than profligacy. It appears that households, in the aggregate, have been using mortgage debt to restructure their balance sheets. As a result, household net worth on a flow basis has not been impaired by the increase in debt stemming from home equity withdrawal," New York's federal reserve bank concluded. | 
