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Refinancing to lift U.S. economy
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October 29, 2001: 11:34 a.m. ET
Lower interest rates could put $50 billion into the economy in 2001.
By Staff Writer Mark Gongloff
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NEW YORK (CNNmoney) - Low interest rates are spurring Americans to refinance their homes, and the extra cash they get and the money they save from doing so will give the sluggish U.S. economy a much-needed lift this year, economists said Monday.
Mortgage lender Fannie Mae (FNM: down $0.73 to $79.92, Research, Estimates) said home refinancing should pump an extra $50 billion into the economy in 2001, with mortgage lending hitting a record high of $1.83 trillion.
"We estimate cash-out refinancing for 2001 is going to raise cash from home equity of about $80 billion," Fannie Mae economist Orawin Velz said. "About 60 percent [about $50 billion] of that will be spent."
That $50 billion is only 0.5 percent of the gross domestic product (GDP) of the United States. But when the economy is as sluggish as it has been lately - it grew by only 0.3 percent in the second quarter - it could make the difference between a shrinking economy and a growing economy.
"Their number is in the right ballpark," Henry Willmore, chief economist at Barclays Capital, said. "It could have a substantial effect potentially."
There are two potential benefits to refinancing a home at a lower interest rate. For one thing, it makes monthly mortgage payments lower, freeing extra cash for spending. And many refinancers get a lump sum of cash, which they spend or put in savings.
Still, it's difficult to judge the effect of refinancing on the economy without taking into account the impact it has on the mortgage lenders.
"For every happy borrower, there's an unhappy lender," said Robert Van Order, chief economist at mortgage lender Freddie Mac (FRE: down $0.50 to $66.92, Research, Estimates), who did agree with Fannie Mae's outlook for a record year for mortgage lending and for activity to double in the next decade to more than $11 trillion.
But most economists expect the refinancing party will likely be over by 2002, returning to normal levels.
"If people refinance once, they won't refinance again," Van Order said. "It might do very little for the economy next year."
Click here for CNNmoney.com's refinancing calculator
Most economists expect a recession, commonly defined as two consecutive quarters of negative GDP, to follow the Sept. 11 terror attacks on the World Trade Center and the Pentagon.
To make borrowing easier and encourage consumer spending, which makes up two-thirds of GDP, the Federal Reserve has cut its target for short-term interest rates nine times this year. Though rates are the lowest in nearly 40 years, the Fed is widely expected to cut rates again at its next policy meeting, scheduled for Nov. 6. 
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