Cash-Out Mortgage Refinancings Hit Record 12.2%

American families used mortgage refinancing to pull cash from their homes at a record 12.2% annual pace in the third quarter, helping to fuel a continued spending spree, but raising the risk of a nasty fall if housing prices falter.

The Federal Reserve’s flow of funds report issued Thursday showed that so-called cash-out refinancings grew at a $320 billion annual rate during the quarter, and that household debt overall climbed at a 9.6% pace, substantially faster than in the hottest years of the 1990s boom.

Analysts said that although some of the funds appear to have gone into improving the homes from which the money was drawn, much more of it went to pay for routine purchases, a dangerous trend.

“It’s setting people up for a big down-drop,” said Goldman Sachs economist Jan Hatzius.

Hatzius said the cash-out refinancing helps explain why consumer spending rose at a 4.1% annual pace in the quarter, helping buoy an otherwise sagging economy. But he said the trend is unsustainable. “Going forward, it has got to come down.

“The only questions are when and how quickly,” he added.

The quarterly Fed report showed that household net worth fell almost a half point to $6.38 trillion between the second and third quarters, largely because of stock-market losses.

Hatzius said that the decline brings the ratio of net worth to income back in line with historical averages. The bulging of net worth relative to income was one of the most striking trends of the ‘90s boom.

“In a sense, the entire explosion of wealth relative to income that occurred in the 1990s has disappeared,” Hatzius said.