Losing Their Grip on Homeownership

Declining Values Put Many Who Took Out Home-Equity Loans in a Bind That May Worsen

NEW YORK -- Homeowners started losing hold of their homes years before spiking foreclosures and the housing slump slammed the economy.

Piece by piece, some gave away part of their homes by tapping equity to take cash out to pay for cars, weddings and vacations. Others never owned one brick. During the country's most recent housing boom, the term "homeowner" threatened to become a misnomer as lenders offered 100 percent or more financing to some buyers.

Now, slipping home prices could further erode the value of many Americans' single largest asset, curbing consumer spending and jeopardizing retirement assets.

Thanks in large part to mortgage-related tax deductions and a drumbeat of advice that everyone should own their home, the U.S. homeownership rate rose steadily in recent decades. It peaked at 69.2 percent in 2004 before backing down to 68.2 percent at the end of the third quarter last year, according to the Census Bureau, which has collected the data since 1965.

But that small decline masks a much larger plunge in the amount of equity homeowners hold. Homeowners' equity fell to an average of 51.7 percent of the value of homes at the end of the second quarter. It was 62 percent at the end of 1990, according to the Federal Reserve, even as the average home value surged 139 percent.

Some economists said the home-equity number will drop below 50 percent by the end of next year, marking the first time homeowners will owe more than they own since the Fed started recording the data, in 1945. The central bank is set to release the third-quarter equity figure Thursday.

"Although homes increased hugely in value, homeowners were borrowing against them as fast if not faster than the appreciation," said Dean Baker, co-director of the Center for Economic and Policy Research. "And when people were buying new homes, they were getting them with as a little as 5 percent, 2 percent down, even nothing at all."

Thirteen percent of first mortgages originated in 2005 and 2006 had down payments of less than 10 percent, according to the Mortgage Bankers Association. One percent of the mortgages surpassed the value of the property.

"How much people put down on the home has always been an important variable for the performance of a loan," said Thomas Lawler, a former official at mortgage lender Fannie Mae who is now a private housing and finance consultant.

"Mortgage lenders lost sight of its importance because most of the loan-level data they used came from the latter 1990s to the early 2000s, when very few places in the country weren't seeing house appreciation," he said.

Falling home values are particularly bad news for homeowners who treated their homes as piggy banks instead of savings accounts. They drained $468.7 billion out of their homes in 2004 through home-equity loans or cash-out refinancings, according to a recent report. Fifty-eight percent of that cash went to home improvements and personal spending, while another 27 percent paid off credit card debt.

They felt confident that housing prices would continue to rise, replenishing the equity they took out.