While pondering whether there is going to be a second half recovery on the basis of stimulus checks, let’s first take a look at the possible repercussions of Cash-Out Refis Lowest in Four Years.

Fifty-six percent of Freddie Mac-owned loans were cash-out refinances in the first quarter of 2008, the smallest percentage since Q2 in 2004, the GSE said Friday. First quarter’s share compares starkly to the 77 percent share of refinancing posted just one quarter earlier, and underscores the new reality for most homeowners.

“A tightening of mortgage underwriting standards throughout the lending industry coupled with declining home values across much of the nation has curtailed the amount of home equity cashed out by homeowners,” said Frank Nothaft, Freddie Mac vice president and chief economist.

Six out seven refinances in 2006 and 2007 had a cash-out component, Nothaft said, and many borrowers increased their mortgage rates to access that cash. In contrast, during the first three months of this year, more than half of all borrowers who refinanced lowered their mortgage rate.

“During the first quarter about $29 billion in home equity was cashed out through refinance of conventional loans made to prime borrowers, off from a downwardly revised $36 billion cashed out in the fourth quarter of 2007. This is about one-third of the amount cashed out in the same quarter a year earlier,” said Amy Crews Cutts, Freddie Mac deputy chief economist.

Less Cash Out Refis = Less Consumption

Assuming the trend continues, and it actually has every reason to not only continue but accelerate on account of both tightening lending standards and falling home prices, there is going to be a reduced potential spending of approximately $174 billion of discretionary spending over the course of the rest of the year as compared to a year ago.

$174 billion is based on the statement “This is about one-third of the amount cashed out in the same quarter a year earlier”. $29B*2 equals $58 billion for the first quarter. Multiplied by 3 gives a $174 billion potential reduction in spending due to reductions in cash out refis for the rest of the year. I was generous by assuming the reduction will not accelerate, even though I think it will.

That more than offsets any so called stimulus from the economic stimulus plan. But let’s be even more generous and assume that only 1/3 of cash out refis typically gets spent. That reduces the reduction in spending to $58 billion which still chews up more than half of the economic stimulus checks.

Let’s now factor in Stimulus Checks Already Spent, reduced spending on account of a Fourth Consecutive Decline In Monthly Payrolls, state cutbacks from the First U.S. Sales Tax Revenue Drop in 6 Years, and changing attitudes as depicted in Cool to Be Frugal.

My conclusion is there is not going to be a noticeable surge in spending in the second half of this year. Those banking on stimulus checks to carry a second half recovery just might wish to reconsider.

Mike “Mish” Shedlock
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