Expect Another Refinancing Wave

 | Sep 30, 2011 | 8:08 AM EDT
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Apparently, the members of the U.S. Federal Reserve believe that long-term interest rates are too high, and lower rates are just the elixir to get our economy moving again. Or maybe they don't, but feel the need to "do something" and that is all they can do. To the man with a hammer, everything looks like a nail. Of course, one of the hopes is that they can drive mortgage rates lower and spark a refinancing boom. There are a variety of reasons that probably won't work this time -- some have been widely heralded, while others are more subtle.

Some of the issues are obvious. So many people have been left with no equity value in their homes that huge swaths of potential refinancings are eliminated off the bat. And just as many people are unemployed, so they cannot qualify on income parameters. Those impediments are well-known.

For the folks who could refinance, how they do it will be the big difference this time around. (I have been thinking about this since I am going through the process at the moment.) Any boost to consumer spending will come from two sources: cash outs and the free cash produced by lower payments. Any boost from cash outs seems remote at best. We played that game once, and with home prices depreciating, most people will have the sense not to load up on more debt. If they do cash out, it will be to retire other debt, so the net boost to spendable cash will be modest at best. People do not think of homes are not ATMs anymore.

In my mind, the biggest issue now is duration. To meaningfully lower your monthly payment, the homeowner would have to take out a new 30-year mortgage. The problem is, if homeowners refinance every few years with a new 30-year note, they will never pay off their mortgage. For young folks in their 20s and 30s, tacking a few years on -- effectively taking out a 40- or 50-year mortgage -- may be acceptable. But the bulk of homeowners are now in their 40s and 50s. Do they really want their retirement to include paying a mortgage well into their 70s and 80s?

What I did with my last refinancing a couple years ago, and what I am doing now, is reducing my duration. My last refinancing was into a 20-year loan, and I am now going down into a 15-year loan. I hold my payment steady, and can look forward to owning my house well before retirement.

I think the surprise change in the coming refinancing wave is that more homeowners will use it to reduce their indebted horizon, rather than reduce payments. It is only common sense, especially as the average age of our society is rising into a range where 30-year loans really effect retirement. If I am right, the refinancing wave will again reduce the incomes of lenders, but it will not affect the disposable income of borrowers that much. All the benefit comes decades out.

Expect to see mortgage applications rising briskly in the weeks and months ahead, and expect to hear about another big refinancing wave. But don't be surprised when this translates into little economic stimulus.

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