Refinancing Is New Risk Tool

Higher rates and rising energy prices have put pressure on consumers, but many mortgage borrowers are learning to refinance their home loans as a "short-term remedy to competing risks in the economy," Freddie Mac economists said in a recent outlook.

Freddie Mac estimates that $500 billion in first-lien mortgages and $650 billion in second liens are scheduled to adjust this year. In addition, Freddie Mac estimates that $81 billion was cashed out of home equity through first-lien refinancing during the second quarter, up from $74 billion in the first quarter.

Motivated by rising short-term interest rates, homeowners have refinanced to roll consumer debt into cheaper first mortgage debt. Borrowers with adjustable-rate loans have also refinanced in response to upcoming rate adjustments.

Slower economic growth and higher inflation are squeezing the housing sector, Freddie Mac said, since family incomes rise more slowly as interest rates have moved higher.

"Housing indicators underscore the retreat of the housing sector as the main driver of economic recovery since the 2001 recession," the Freddie Mac August Outlook said.

"Home-equity wealth gains have been key to supporting consumer spending," Freddie Mac noted. But with price gains slowing, this means of sustaining consumer spending will diminish as well.

Freddie Mac's economic team predicts that 30-year mortgage rates will remain below 7% for the balance of this year and the initial rates on one-year ARMs will stay below 6%.

SNAPSHOT: Mortgages Scheduled to Reset This Year

First Liens $500 Billion

Second Liens $650 Billion

SOURCE: Freddie Mac (c) 2006 Mortgage Servicing News and SourceMedia, Inc. All Rights Reserved. http://www.mortgageservicingnews.com http://www.sourcemedia.com

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