Homeowners Refinance Into Bigger Mortgages

Because long-term financing is currently just as cheap, if not cheaper, than short-term financing, it can be less costly to tap into your home equity through a cash-out refinancing than through a home equity line of credit. Fannie and Freddie don't track how homeowners spend the money they borrow, but it's possible that some people are using the additional cash from their larger mortgages to pay off more expensive home equity lines.

"Recently, due to the flat-to-inverted yield curve, many borrowers have found that the most economical way to tap in to this home equity is through a cash-out refinancing transaction instead of through a closed-end second lien mortgage or home equity line of credit," Fannie's chief economist says in his weekly report.

Fannie and Freddie buy mortgages from lenders; they then guarantee the interest and principal payments and repackage them as collateral for mortgage-backed securities. Their repeat-borrower databases contain loans backing properties where they have guaranteed successive mortgage taken out by the same borrowers.

The two companies only buy mortgages made to consumers with good credit. So their data do not indicate that weaker borrowers are piling in more debt. In fact, so many subprime borrowers are running into problems that it's becoming tough for them to get new loans.