Study Credits Mortgage Refi's With Driving Economy

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A new study suggests that the boom in mortgage refinancing accounted for 20% of the growth in gross domestic product in the past two years.

"It is important to realize that the refinancing boom has been instrumental in keeping the economy together as long as it has been together," said Mark Zandi, the chief economist at

About $1.2 trillion of mortgages were refinanced last year, and experts say this year's tally will be $1.25 trillion to $1.4 trillion. But the refinancing boom "will eventually wane, and we can't continue to depend on it to support our economy," Zandi said.

In his report, issued last week, he put the benefits of the refinance boom in two categories: those coming from the money taken out of home equity in cash-out refinancings and those coming from the savings on mortgage rate payments. Zandi said borrowers took out as much as $100 billion in cash-outs in 2001 and that they will have taken out as much as $170 billion this year.

He found that borrowers used this money in three ways: consumer-goods spending (from home improvements to vehicle purchases to vacations and education); repaying higher rate debt (including credit cards, second mortgages); and financing other investments. "Last year's recession would have been substantially more severe and this year's recovery even weaker if not for the strength" of the housing and mortgage markets, the report says.

It should be noted that the study was commissioned by a client with a large stake in keeping public policy supportive of certain players in the mortgage industry: the Homeownership Alliance, a public-advocacy coalition organized by Fannie Mae two years ago to counter the government-sponsored enterprise's critics.

The Mortgage Bankers Association of America says refinance mortgage volume will drop to $762 billion in 2003.

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