Cash-out refinancings drop sharply

The amount of money that homeowners pulled out of their homes through so-called cash-out mortgage refinancings plunged more than 50% in the fourth quarter of last year to a 3 1/2 -year low, Freddie Mac reported.

“This is real evidence of the upset in the mortgage credit markets as well as the impact of the decline in home values that occurred late in the year,” said Amy Crews Cutts, deputy chief economist at Freddie Mac.

A large volume of cash-out mortgages in recent years has helped bolster consumer spending.

But the sub-prime mortgage meltdown has made it harder to get all kinds of home loans, and falling housing prices have reduced or eliminated the equity that people have in their properties.

And more home-price depreciation projected by economists for this year would further slash equity and could damp consumer spending, economists say.

“Research conducted by Fed economists suggests that consumers are more sensitive to changes in their home equity than to changes in stock market wealth,” Cutts said.

The amount of cash taken out by homeowners in refinancing their home loans totaled $37.8 billion in the fourth quarter of 2007, down from $77 billion a year earlier, Freddie Mac said Friday. The latest figure was down 35% from the third quarter’s $58.3 billion, the government-chartered mortgage investor said in a statement.

The effect on consumer spending may already be registering. Most major U.S. retail chains this week posted softer January sales.