It’s the strongest sign yet that Americans’ home-loan debt burden is beginning to ease after the record borrowing that created, and ultimately popped, the housing bubble, leaving almost a quarter of homeowners with mortgages owing more than their properties were worth, said Richard DeKaser, deputy chief economist at Parthenon Group in Boston. Half the mortgages refinanced in the fourth quarter reduced loan size, a record, according to Freddie Mac, the government-owned mortgage buyer.
“The willingness of homeowners to carry housing debt has been radically altered,” said DeKaser, former chairman of the American Bankers Association’s Economic Advisory Committee. “When the market was booming, a mortgage was used as a leveraging tool, and now it’s seen as a risk.”
Measured as a share, rather than in dollars, homeowner equity was 41 percent of U.S. residential property value in the first quarter, including homeowners who don’t have mortgages, according to the Fed study released last week. The last time the share was that high was in the third quarter of 2008 when it was 43 percent.
“People got too overleveraged in the boom years, and that left them with too much debt when the bubble burst,” said Paul Miller, a managing director with FBR Capital Markets in Arlington. “Now, they’re trying to put themselves back on solid ground.”
Residential mortgage debt peaked in 2007 at $10.6 trillion, doubling in six years, according to Fed data. Since then, it has fallen 7 percent as the value of all residential property has dropped 23 percent.
Americans aren’t just bringing money to the table when they refinance their mortgages. Many also are choosing to shorten the term of their loans, which increases monthly payments. The average mortgage term fell to 27 years in March and April from 29 years February. Almost all U.S. mortgages have either 30-year or 15-year terms. When the average falls, it shows more people are choosing the shorter period.
The average U.S. rate for a 30-year fixed mortgage has tumbled since early 2011 to 3.71 percent last week, rising from the previous week’s record-low 3.67 percent. Refinancing applications, meanwhile, are at a three-year high.
DeKaser of Parthenon attributes the reduction in mortgage debt to a “fear factor.” A lackluster recovery that still has one of every 15 people unemployed has persuaded some borrowers of the wisdom of thriftiness, he said.
“People are worried about falling home prices and they’re worried about the economy,” DeKaser said. “If they can afford it, they’re paying down their mortgages instead of buying things because it makes them feel like they’ll sleep better at night.”