Cash-Out Peak Was Last Year

Cash-out refinancings may have peaked last year when homeowners walked away from the closing table with $313.9 billion in their pockets to spend on cars, home improvements and vacations, according to data compiled by Freddie Mac.

Last week, the company reported that borrowers refinancing their mortgages tapped $70.5 billion in equity in the first quarter, down from $77 billion in the fourth quarter and $80.2 billion in the third quarter.

"Cash-out refinance volume is expected to decline over 2007, due to an expected 6% reduction in overall mortgage origination activity and a fall in the refinancing share of originations to around 44% for the year," Freddie deputy chief economist Amy Crews Cutts said. In 2006, the refinancing share of originations was 49%.

Eric Belsky, executive director of the Joint Center for Housing Studies at Harvard University, estimates the homeowners extracted $460.1 billion in home equity last year, down only slightly from $461.4 billion in 2005.

Homeowners continued to use their homes like "piggybanks" last year to support their spending habits, Mr. Belsky told the National Association of Home Builders at its semi-annual construction forecast conference.

"This is not likely to be sustained in an environment with prices starting to fall. People will not feel comfortable borrowing against their equity," Mr. Belsky said.

In estimating the amount of home equity cashed out each year, the JCHS executive director uses Freddie data for cash-out refinancings, along with equity extracted through home sales and new second mortgage debt.

Freddie's data show that the number of refinances was down in 2006 but the amount of cash received at closing totaled a record $313.9 billion, compared to $270.3 billion in 2005. (Freddie originally reported $261.9 billion was cashed out in 2005. But Harvard researchers adjusted it upward for inflation.)

Mr. Belsky estimates that home sellers spend about 15% of the proceeds they receive at closing, which boosted spending by $70.2 billion in 2006, compared to $78.7 billion in 2005.

Meanwhile, new second mortgage debt totaled $76 billion last year, down from $112.4 billion the previous year.

These numbers show that consumers have tapped $921.5 billion in home equity over the past two years. And despite a slowdown in the housing market, consumer spending has not fallen. "That shoe has not dropped," Mr. Belsky told the construction forecast conference.

Snapshot: Cash-Out Refinancing

3rd Qtr. 2006 $80 Billion

4th Qtr. 2006 $77 Billion

1st Qtr. 2007 $71 Billion

Source: Freddie Mac (c) 2007 Mortgage Servicing News and SourceMedia, Inc. All Rights Reserved. http://www.mortgageservicingnews.com http://www.sourcemedia.com

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