As mortgage guidelines loosened between 2002 and 2006, homeowners often used their home equity to retire credit card and other consumer debt.  They did this by increasing the size of the mortgage and taking “cash out” from their home.

As you’d expect, this type of mortgage transaction is called a “cash out” refinance.

Well, now that mortgage guidelines are tightening, it’s growing more difficult for a homeowner to engage in this type of home loan. 

Mortgage lenders are restricting the total amount of equity that can be withdrawn from a home, usually as a percentage of the home’s value.

This may be one reason why the amount of credit card debt is rapidly increasing among Americans. 

Throughout May and June, for example, credit card balances increased 12% and 8% respectively even as consumer spending remained relatively flat.

Therefore, we can hypothesize that Americans — unable to “cash out” from their homes — are putting more money on their credit cards and slowly reaching their collective credit limits (upon which the borrowing stops).

When the borrowing stops, spending stops, too, and this has the impact of slowing down the economy. 

A slower economy, of course, reduces inflationary pressures and that makes the U.S. dollar stronger to international investors.  That strength, in turn, creates buying pressure on mortgage bonds which pushes mortgage rates down for everyone.  Naturally, lower rates encourage more borrowing.

Yes, it’s a cycle.  And it’s one worth watching.

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