Postponing the pain:

Over at Calculated Risk, there is an excerpt of a recent Freddy Mac report on refi activity. Key lines: (emp add)

In the second quarter of 2006, 88 percent of Freddie Mac-owned loans that were refinanced resulted in new mortgages with loan amounts that were at least five percent higher than the original mortgage balances, according to Freddie Mac's quarterly refinance review.

The staying power of refinance activity has been much stronger than we initially thought," said Frank Nothaft, Freddie Mac vice president and chief economist. "But borrowers are reacting to both incentives to cash out home equity through refinance and incentives to change their mortgage as they hit an interest rate adjustment.

The incentive to take cash out of home equity is partially driven by the rapid rise in short-term interest rates like the prime rate. Many borrowers have seen their rates on home equity lines of credit – which are tied to the prime rate – rise. Now they are consolidating those HELOC loans into a new first lien mortgage to reduce their mortgage payments ...

Because rates on home equity lines of credit have risen to 8.25 percent or higher, borrowers who are looking for an inexpensive way to finance home improvements or business investments, or to consolidate high cost debt, are turning to cash-out refinance. These borrowers are often willing to refinance into higher rates on their first lien mortgages.

As Calculated Risk remarks in the comments section: [MEW = mortgage equity withdrawal]

These numbers make me more pessimistic. When I looked at the BEA's Mortgage Interest supplement to the GDP report - I was surprised and disappointed that MEW hadn't fallen more. This Freddie Mac data is more evidence that MEW is strong - even while consumer spending is falling - a bad sign.

What happens to consumer spending when MEW does fall (and I'm sure it will)?

posted by Quiddity at 8/03/2006 08:20:00 AM