An unprecedented boom in mortgage refinancing that started in 2001 has helped keep the economy moving, igniting 20 percent of the real growth in the nation's gross domestic product, according to a new study commissioned by the Homeownership Alliance.

The alliance is a Washington-based coalition that includes the Fannie Mae, Freddie Mac, the National Association of Home Builders, the National Association of Realtors and others.

Written by Mark Zandi, chief economist and co-founder of Economy.com in West Chester, Pa., the study analyzes the effects of the mortgage refinancing boom of the last 12 months on national, regional and local economic growth.

Since 2000, fixed mortgage rates have fallen to a 40-year low of nearly 6 percent. Interest rates on adjustable mortgages also have fallen, and now stand at slightly more than 4 percent, the lowest level since this alternative method of housing-purchase financing was introduced more than 30 years ago.

As a result, millions of homeowners have refinanced their mortgages, providing borrowers and the economy with more than $274 billion in interest rate savings. "Last year's recession would have been substantially more severe and this year's recovery stalled if not for the strength of these markets," Zandi said. "Mortgage refinancing now accounts for an astounding 20 percent of real gross product growth."

Since the refinancing boom began two years ago, close to $2.5 trillion in mortgage debt has been refinanced. "That's nearly half of all mortgage debt outstanding," said Zandi. The study also estimates $1.24 trillion in mortgages will have been refinanced in 2002, accounting for nearly 20 percent of all outstanding mortgage debt. This is in addition to the $1.2 trillion refinanced in 2001.

The study analyzes how refinancing activity impacts the economy and quantifies its national and regional economic impact. "While the stellar economic contribution of housing during this economic downturn has been well documented, the contribution of refinancing activity has not," said Rick Davis, president of the Homeownership Alliance. "This new study examines a crucial element of the housing industry that is having a profound impact on the economy."

"The finding that mortgage refinancing is driving the economy -- accounting for 20 percent of the growth of real gross product -- is further proof that housing is a vital national priority that creates value and builds wealth," Davis said.

"Refinancing is a major component of housing's important contribution to the economy and positively impacts individual homeowners by providing a method for raising cash in difficult economic times," he said.

Most economists believe that the high level of refinancing activity boom has provided a much-needed boost to the economy across the country. Every region is benefiting, the study showed, but some regions are benefiting more than others.

The most significant economic contribution from refinancing has been in the Northeastern United States and on the West Coast.

In particular, over the last two years, the refinancing boom has generated more than $64 billion in cash in the Northeast and $63.3 billion in the Pacific region. Other regions getting a boost from refinancing are the South Atlantic with $49.4 billion, the South Central with $28.7 billion, the Midwest with $48.6 billion and the Mountain region with $17 billion.

Metropolitan areas that saw the largest cash infusions from the refinancing boom include Boston with $11.6 billion; Detroit, at $5.2 billion; Nassau and Suffolk Counties on Long Island, with $5.5 billion; New York City at $7.8 billion; Washington at $8 billion; Chicago with $9.1 billion and Los Angeles at $13.4 billion. The housing and mortgage markets have been instrumental in supporting the broader economy, the study showed, and refinancing has provided an instrumental element for the industry's success.

The contributions of refinancing activity to the economy are numerous. For example refinancing allows homeowners to lower their debt payments, raise cash to finance more spending, restructure their liabilities by reducing higher-cost liabilities and lock in historically low long-term interest rates. Many homeowners have found their interest rate savings on their newly refinanced mortgages are so substantial that they are able to do all these things. According to Zandi, housing's contribution to the economy will continue in 2003.

"Even if mortgage rates do rise in 2003, the economic benefits of the current refinancing activity will linger on for some time," he said. "The refinancing boom is largely responsible for allowing households to insulate themselves from the potential negative financial impact of rising interest rates."

"Home sales and mortgage origination volumes have never been stronger and single-family homebuilding and house price gains are as strong as they have been in a quarter century," Zandi said.

Published: January 2, 2003

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Al Heavens writes about real estate and home repair and improvement. He is the author of What No One Ever Tells You About Renovating Your Home: Real-Life Advice For Hassle-free, Cost-Effective Remodeling.