Consumer Borrowing is Accelerating,
Despite Mortgage Refinancings

Consumer credit outstanding rose sharply in April, according to the Federal Reserve. The amount of non-mortgage credit outstanding (including automobile loans, credit card balances and other personal loans, but excluding auto leases and loans secured by real estate) rose at 10.7 percent seasonally adjusted annual rate to $1.58 trillion. Of that total, $697 billion was credit card debt. Credit card balances rose at 16.0 percent annualized rate.

The strong growth in non-mortgage balances is even more surprising in light of a study recently released by MGIC Capital Markets Group, a division of Mortgage Guaranty Insurance Corp, the country's largest home loan insurer. The MGIC study found that in the current mortgage-refinancing boom, the average borrower took out a new loan that was $41,000 larger and at an interest rate 0.6 percent higher than the original mortgage, which was refinanced. Apparently, borrowers are capitalizing on low mortgage rates to restructure their balances sheets by rolling higher cost, non-tax-deductible consumer debt into a lower cost mortgage. Such a transaction raises total mortgage debt but lowers total monthly debt payments and shifts interest charges into a tax-deductible form.

When re-structuring is the object of the refinance, the old rules of thumb regarding how much lower a mortgage rate must be to benefit from refinancing no longer apply. The MGIC study was based on an analysis of a 14 million-loan national database containing a representative sample of conventional, FHA_VA and other mortgage refinance transactions from all regions of the country. MGIC researchers indicated that this is the first refinancing boom they've witnessed in which a sizeable portion of homeowners are choosing higher interest rates and higher loan-to-home value than they had before the refinance. Nearly 40 percent of borrowers who had private mortgage insurance (PMI) before refinancing still had it on their new loan. Mortgage lenders typically require PMI when the borrower has less than 20 percent equity in their home. Even more surprising, 15 percent of borrowers who did not have PMI on their prior loan ended up having PMI on the refinanced loan.