U.S. Mortgage Debt Falls to Five-Year Low as Wealth Effect Fades

The Headquarters Of Fannie Mae
The mortgage lending that boosted spending and padded bank profits during the 2001 to 2006 surge in home prices is failing to aid the U.S. economic recovery, Doug Duncan, chief economist of mortgage-financier Fannie Mae, said in a telephone interview from Washington. Photographer: Andrew Harrer/Bloomberg

U.S. mortgage debt, a driver of consumer spending during the real estate boom, dropped to the lowest level in almost five years in the third quarter as foreclosures wipe out home loans and housing purchases fall.

The volume of outstanding home mortgages declined to $9.88 trillion from $9.94 trillion at June 30, according to Federal Reserve data released today. The reading was the lowest since the end of 2006. Mortgage volume peaked at $10.6 trillion in early 2008, the final months of a decade-long borrowing binge.

The mortgage lending that boosted spending and padded bank profits during the 2001 to 2006 surge in home prices is failing to aid the U.S. economic recovery as the worth of real estate plunges, Doug Duncan, chief economist of mortgage-financier Fannie Mae, said in a telephone interview from Washington. Outstanding home-loan volume may drop “for at least another couple of years,” he said.

“Consumers are still leveraged well above average,” Duncan said. “That has to be worked off before you’ll see a return of robust consumption.”

Lending for mortgages to purchase homes probably will fall to $80 billion in the fourth quarter, the lowest since 1991 and one-fifth the volume of a record high in mid-2005, according to the Mortgage Bankers Association in Washington. Home prices are down 31 percent from a July 2006 peak, based on the S&P/Case-Shiller home price index of 20 U.S. cities.

Underwater Loans

Declining property values have wiped out more than $4 trillion in real estate wealth over four years, according to the Federal Reserve, and left almost a third of U.S. mortgage payers owing more than the value of their house, data from Zillow Inc. show. The 29 percent of mortgaged homeowners who were underwater on their loans in the third quarter is up from 23 percent a year earlier, according to the Seattle-based real estate information and sales service.

Kenna Stormogipson, in Oakland, California, is one of those underwater borrowers. She said she’s stuck in a house she bought for $485,000 in 2005.

“You can’t leave,” said Stormogipson, 31, a high school science teacher. “You can’t really spend money on anything else.”

The duplex home, which has first and second mortgages totaling $462,000, would sell for about $200,000 today, she said. Loan payments took up more than half of her monthly $5,000 salary, she said.

Stormogipson stopped making full mortgage payments six months ago because her lender wouldn’t agree to a loan modification. This Christmas, she’s going to make gifts at home, such as soap and arts and crafts items.

‘Big Problem’

“Negative equity is the big problem,” Stan Humphries, chief economist for Zillow, said in a telephone interview. “It’s hard to come up with a way to erase the negative equity that’s fair to homeowners who were going to continue to pay and in a way that doesn’t bankrupt either the banks or the taxpayer.”

Homeowners who aren’t underwater have been able to put more money in their pockets by refinancing at historically low interest rates. The average U.S. rate for 30-year fixed mortgages was 3.99 percent this week, just above a record low of 3.94 percent on Oct. 6, according to Freddie Mac, the McLean, Virginia-based mortgage-finance company.

The rate likely will be 4.2 percent this quarter and match that level in the first three months of 2012, according to a forecast from the Mortgage Bankers Association. That would be the lowest quarterly number in Freddie Mac records dating to 1971.

Refinancing Terms

While 4.5 million homeowners refinanced last year, an estimated 2.3 million others were ineligible for lowering monthly payments because of home-value declines, according to a September Federal Reserve report. President Barack Obama in October directed Fannie Mae and Freddie Mac, which have both been under U.S. government conservatorship since 2008, to ease refinancing terms for underwater homeowners.

The volume of outstanding mortgage debt probably will fall further in 2012, Humphries said, as homeowners continue to pay down principal and properties are taken over by banks. About 4.5 million homes with $800 billion in mortgages are more than 90 days delinquent, and most of those will be repossessed, Fannie Mae’s Duncan said. Currently, about 2.2 million homes are in foreclosure, according to Lenders Processing Services in Jacksonville, Florida.

Cars, Televisions

Plunging home values have counteracted the so-called wealth effect that spurred people to spend money as real estate values grew. Consumers spent about $677.3 billion, or about $113 billion a year, from home-equity loans on purchases such as cars or televisions during the 2000 to 2005 real estate boom, according to a 2007 paper by former Federal Reserve Chairman Alan Greenspan and Fed economist James Kennedy. Another $376.2 billion, or about $63 billion a year, went toward home renovations.

During the last five years, households may have cut spending even more than they expanded it during the real estate boom, Chad Wilkerson and Megan Williams, economists at the Federal Reserve Bank of Kansas City, wrote in a report earlier this year.

“Consumption can be more sensitive to changes in housing wealth than other types of wealth,” the economists wrote.

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