US mortgage cuts offer spending boost

US mortgage cuts offer spending boost
By Saskia Scholtes and Chrystia Freeland in New York
Copyright The Financial Times Limited 2009
Published: May 3 2009 22:36 | Last updated: May 3 2009 22:36
http://www.ft.com/cms/s/0/d586a694-3828-11de-9211-00144feabdc0.html


US homeowners could save close to $18bn (€13.5bn, £12bn) on their mortgage repayments this year as record low interest rates allow millions of borrowers to switch to cheaper home loans.

Those people that took advantage of cheaper borrowing costs in the first quarter saved about $160 a month on a $200,000 loan, Frank Nothaft, chief economist at Freddie Mac said.

“In aggregate, this adds up to about $2.5bn in extra spending cash in the pockets of those homeowners to spend over the coming year.”

With the refinancing trends expected to be boosted by the government’s plans to help more borrowers to qualify for mortgage renegotiations, this year’s savings for homeowners could reach $18bn.

The sum would add firepower to the existing stimulus and underpin US personal consumption, which totalled $10,000bn in 2008.

Wilbur Ross, the billionaire investor, said in an interview with the Financial Times that the positive effects of giving consumers additional disposable income were being felt.

“It’s already having hundreds of billions of dollars of impact. The consumer is 70 per cent or thereabouts of the economy, so those are high-velocity dollars,” he said.

The savings are based on refinancing loans that qualify for backing by Freddie Mac and rival Fannie Mae with a 5 per cent interest rate. Few borrowers with non-qualifying loans – either because their mortgages are too large or too risky – will benefit because interest rates on this debt remains high.

Under the government programme, borrowers who have mortgages owned by Fannie Mae or Freddie Mac can refinance without additional mortgage insurance costs, even if the loan is more than 80 per cent of a home’s value.

The government-run mortgage financiers can refinance loans up to 105 per cent of a property’s value.

But John Ryding, chief economist at RDQ Economics, warned that the impact of the savings on the economy might not be as immediate as some hope.

It can take up to a year for borrowers to recoup the cost of refinancing fees from their savings, while some of the benefit will also be offset by a higher tax bill, he said.

Mortgage interest payments are tax deductible. Similarly, the benefit of savings for consumers could be offset by the lower investment income for investors in mortgage bonds.