Lessons learned? Lenders still pitching refinancing

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Good piece in today’s Los Angeles Times reporting that big lenders are still aggressively pitching home refinancing: ‘Despite the mortgage meltdown, the blizzard of advertising for home loans continues. With the sub-prime market in tatters in the wake of record defaults and foreclosures, fewer pitches scream ‘Bad credit? No problem!’ Instead, lenders struggling to remain profitable now are targeting people who have good credit and plenty of home equity.’

Countrywide Financial is a big player: ‘David Sambol, Countrywide’s president, told financial analysts Friday ... ‘There remains a very large stock of home equity that has not yet been tapped -- greater than $10 trillion -- which can be tapped to finance home improvements and other expenditures, such as education investment, small-business development and retirement spending.’ ‘

Our take: One of the reasons this real estate downturn threatens to do unusually widespread damage to the overall economy is the refinancing boom. Even some buyers who bought their houses a decade ago, and should in theory be sitting on a small mountain of equity, are finding themselves in default and foreclosure. Why? Where did their cushion, that mountain of equity, go? They borrowed against it. Again, and again, and again. The refinancing boom has distorted economic activity in ways policy-makers seem to be ignoring: In the recent past, it pumped up economic activity with spending growth that could not be justified based on income growth; and now, not only is much of that extra economic activity drying up, but refinancing has put at risk homeowners who should in theory have a cushion against a housing downturn.

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