Refinance rebuilds U.S. savings as growth delayed

Americans’ drive to rebuild savings and pay down debt may mean the gains from the current mini boom in mortgage refinancing will accrue over years rather than have a more immediate effect on the U.S. economy.

Aided by record-low interest rates and an expansion of government programs, the value of home loans refinanced this year will rise to $932 billion from $858 billion in 2011, according to projections from the Mortgage Bankers Association. The group’s gauge tracking the volume of credit being reworked climbed at the end of July to the highest level in three years.

The typical borrower redoing a $200,000 mortgage last quarter will save about $2,900 in interest over the next year, according to figures from Freddie Mac. Nonetheless, the extra cash may not be spent soon as households continue to focus on repairing finances.

“The initial benefit is not as significant as the large dollar-savings figures would seem to indicate,” said Mark Vitner, senior economist at Wells Fargo Securities LLC in Charlotte, N.C., a subsidiary of the largest U.S. mortgage lender. “It does provide a benefit to the economy, but that benefit actually grows over time.”

The Standard & Poor’s 500 Index fell for the first time in seven days, ending the longest winning streak in 20 months, as slower-than-forecast economic growth in Japan added to investor concern of a global slowdown. The S&P 500 declined 0.1% to 1,404.11 at the 4 p.m. close in New York.

REBOUND WANES
The recent increase in U.S. mortgage refinancing is still well short of the record $2.5 trillion refinanced in 2003 when then-Federal Reserve Chairman Alan Greenspan was also trying to spur a recovery.

The Obama administration has made easing the housing slump one of the pillars of its attempt to revive the world’s largest economy. The president has touted the $3,000 in yearly savings as one of his accomplishments.

“If households are going to save $3,000 a year, I would expect that to make a difference,” said Paul Edelstein, director of financial economics at IHS Global Insight in Lexington, Mass. “The problem is, in the current environment, a lot of that money may get saved or used to pay down other debt so the effect might be minor.”

Economist Vitner may be a case in point. He refinanced a year ago and hasn’t made any large purchases as a result, he said. Nonetheless, a year later, he’s about to start on a home remodeling project.

The personal saving rate climbed to 4.4% in June, a one-year high, from 4% the prior month, according to figures from the Commerce Department. The rate, which is the share of after-tax income that Americans manage to squirrel away, averaged 5% from 2008 through 2009, at the height of the financial crisis, and 2.5% from 2006 through 2007, the two years leading up to the recession.

A gauge of household indebtedness fell for a record 12 straight quarters to the lowest level since 1994. The ratio of household debt payments to disposable income declined to 10.98 in the first quarter, down from a peak of 13.96 in September 2007, according data from the Fed.

Household consumption rose at a 1.5% rate from April through June, down from a 2.4% gain in the prior quarter. Purchases added 1.05 percentage points to the rate of economic growth last quarter, which was also 1.5%.

MENDING FINANCES
By contributing to an improvement in household balance sheets, refinancing may lead to a pickup in consumer spending that will eventually help the economic expansion accelerate.

Economists Mark Zandi and Susan Wachter are among those predicting the improvement in spending as a result of the jump in refinancing will be more immediate.

“Three thousand dollars is not a small sum and it does make a difference,” said Wachter, a professor of real estate and finance at the University of Pennsylvania’s Wharton School in Philadelphia. “By no means is $3,000 going to be put entirely into savings.”

Zandi, chief economist for Moody’s Analytics Inc. in West Chester, Penn., said any extra savings from refinancing will rapidly end up in the economy.

“It provides a meaningful boost to the economy,” Zandi said. “It acts as a tax cut. If homeowners spend less on their mortgage, that opens up cash.”

In a May report for Pew Charitable Trusts, Zandi and Wachter estimated that assuming the average homeowner can refinance into a 4% fixed-rate loan, the gross saving from lower mortgage payments would be about $18 billion a year. The bulk of that would be spent on things like home improvements, adding about 0.1 percentage point to growth this year, they said.

MORTGAGE SUPPORT PROGRAMS
Government initiatives are also starting to enable more Americans to rework loans. Homeowners using the Home Affordable Refinance Program, which allows the refinancing of properties that are worth less than their underlying mortgages, represented 33% of total refinancing volume in June, the most ever for the plan, according to the Federal Housing Finance Agency.

Those owing more than 105% of the current value of a home accounted for 62% of all HARP volume in June, up from 32% in May.

In the Fed’s quarterly survey of senior loan officers, bankers said HARP refinancing applications accounted for a significant share of applications over the past three months and they anticipate more than 60 percent of HARP applications will be approved and successfully completed, the report showed last week.

“It’s one of the most important things we could do for the economy in the short term to boost consumer spending and the ripple effects that come from that,” Housing and Urban Development Secretary Shaun Donovan said in interview in Cleveland last month.

A report tomorrow (Aug. 14) may show retail sales climbed in July for the first time in four months as employment picked up, according to the median estimate of economists surveyed by Bloomberg.