American consumers and homeowners haven't shared Wall Street's enthusiasm last week for the war on Iraq. They're more worried about rising joblessness and general economic stagnation, and their spending remains restrained.

Simultaneously, Americans are refinancing their homes at record-setting levels, raising the question: Where is all that refi money going?

In some regard, homeowners are doing the prudent thing and using refinance proceeds to increase savings and pay off debts. Some have yet to reap their refi benefits, which could augur increased spending later in the year when (hopefully) the geopolitical and economic pictures will be clearer. Then there's the question of whether all this refi activity really is a "good" thing.

Lower Rates Lowers Refi Boom

The Mortgage Bankers Association of America's weekly index of mortgage loan applications increased 4.3% for the week ended March 14, to another record high of 1673.4, seasonally adjusted. Refinance activity represented 80.5% of total applications, also a record.

"While mortgage rates are rising, they remain historically low, and this is propelling refi demand," observed Mark Zandi, Economy.com's chief economist.

As of Friday, average 30-year fixed-rate mortgages were at 5.79%, up from a 32-year low of 5.61% on March 14, according to

Freddie Mac

(FRE)

. In the same period, 15-year fixed mortgages rose to 5.11% from 4.93%.

The sharp rise in Treasury yields in the past week might signal an end to the refinancing boom, or perhaps spark one last surge of applications from folks still waiting to pull the trigger.

The refinancing boom in 2003 had surprised Jay McIntosh, head of Ernst & Young's retail industry group. Earlier this year, he didn't think mortgage and interest rates could fall much further. More surprising to McIntosh is that the surge in refinancing hasn't led to a corresponding increase in consumer spending, as was the case previously.

"There's been a lot of money created by home refinancing," he said -- one of the great understatements of all time: The

Federal Reserve

estimates the dollar volume of refinancings was a record $1.75 trillion in 2002 (the vast majority of which went back into mortgages), net of cash-outs.

But "I'm concerned that consumer psychology might not be inclined to spend," McIntosh said.

Retail sales declined 1.7% in February, the largest month-to-month decline since November 2001. As of March 15, the Bank of Tokyo-Mitsubishi-UBS Warburg had reported three straight increases in its weekly retail chain-store sales index, the first time that's happened since late January. Still, the 16-week rate of change for the index is a paltry 0.16% per week. After falling 2.6% in January and 3.4% in February, auto sales are expected to drop to four-year lows this month, according to J.D. Power & Associates.

Some reports indicate consumers are using refinance monies to (

gasp

) increase their savings or to pay down debt.

Approximately $70 billion of the aforementioned cash-outs "was apparently applied to repayment of home-equity loans, and a significant part was employed to reduce higher-cost credit card debt, judging from the slowed pace of growth in installment debt outstanding," Fed chairman Alan Greenspan said in a

speech on March 4.

Thanks to a 0.3% rise in personal incomes and a modest 0.1% rate of consumption, the U.S. savings rate rose to 4.3% in January, up from 3.9% in December and vs. less than 1% in early 2001. Meanwhile, consumer credit growth rose 4% in 2002 vs. 8% in 2001, according to Briefing.com.

Delayed Reaction Likely To Be Restrained

There is another explanation of American's reluctance to spend any refinancing windfall, and it has nothing to do with geopolitical concerns, higher energy prices, a newfound fiscal discipline, or even consumers having satiated themselves with the late-1990's spending orgy. Many homeowners may not have enjoyed their refi windfall, just yet.

"Ordinarily, consumer spending responds with a lag" to the aforementioned MBA application data, said John Lonski, chief economist at Moody's. "It may be until the second half

of 2003 does that breakneck, elevated pace of mortgage refinancing in the second half of 2002 and early 2003 begin to boost consumer spending."

Perhaps in anticipation of that next spending boom, the S&P Retail Index had risen 16.5% from March 11 through Friday's close, outpacing the broader market's war-related rally.

But lest you think this is another bullish "second-half recovery" story, Lonski does not expect runaway consumer spending later this year. "High levels of debt service and the drop in net worth

tied to stock holdings should rein in improvement in consumer spending," he said.

Household debt is currently 14% of after-tax income, near record highs and above the roughly 12% levels in place at the onset of the recovery in the early 1990s, the economist observed. "It's heartening we're seeing mortgage refinancing proceed at stratospheric levels," he said. "That ought to provide support, but you can't get carried away into concluding consumer spending will handily best its pace of last year."

Indeed, Lonski forecasts consumer spending will rise 2.7% this year vs. 3.1% in 2002.

Parting Short

Then again, some folks aren't at all "heartened" by the recent refinancing splurge.

"Manic refinancing" activity underscores the "mortgage finance bubble blow-off," Doug Noland, financial markets strategist at David Tice & Associates in Dallas, recently commented at the Prudentbear.com Web site.

Total mortgage credit expanded at a record annualized rate of $1.07 trillion in 2002's fourth quarter, Noland estimated, with household mortgage debt surging at an annualized pace of $854.7 billion, a whopping 60% increase from 2001's record $530.9 billion.

To Noland, mortgage refinancing and other housing debt activity are at the leading edge of a "credit bubble" that undermines the financial soundness of the global economy. St. Louis Fed President William Poole brought more pointed attention to this issue on March 10, with his

critical comments about Freddie Mac and

Fannie Mae

(FNM)

.

Poole expressed concern about the burgeoning size of the two government-sponsored enterprises, whose primary role is to facilitate home ownership by purchasing mortgages from banks and other mortgage brokers. Because many investors mistakenly believe Fannie and Freddie are backed by the U.S. government, they have been able to borrow money at below-market rates and steadily increase the size of their mortgage-backed and related derivatives portfolios to such immense proportions that Poole fretted: "Should either firm be rocked by a mistake or by an unforecastable shock, in the absence of robust contingency arrangements, the result could be a crisis in U.S. financial markets that would inflict considerable damage on the housing industry and the U.S. economy."

Shares of Fannie and Freddie have recovered since Poole's swipe, in concert with the broader stock market rally. Nevertheless, the latest refi boom has only further entrenched and increased the economic significance of those GSEs.

Aaron L. Task writes daily for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send your feedback to

Aaron L. Task