Magazine article Economic Trends

Mortgage Borrowers Deleverage

Magazine article Economic Trends

Mortgage Borrowers Deleverage

Article excerpt

11.22.10

The housing bubble that preceded the last recession left many borrowers overleveraged once the recession struck. According to the Board of Governors, from March of 2000 to September of 2007, the homeowner mortgage obligation ratio, which measures the outstanding value of mortgage payments as a percentage of disposable income, grew from 8.6 percent to 11.3 percent. However, since the peak of the last business cycle in 2007, consumers have begun to deleverage their balance sheets. This trend is evident in the housing market where consumers have been reducing their exposure to mortgage debt by financing more home purchases with cash and reducing both the loan-to-value ratios and the term to maturity of their mortgage debt.

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For the month of September, cash was the number one source of financing for home purchases. According to the November 9 edition of Inside Mortgage Finance, which includes the most recent Campbell/Inside Mortgage Finance Monthly Survey of Real Estate Market Conditions, 30.5 percent of home purchases were financed with cash, up from 24.4 percent in January. The Campbell/Inside Mortgage Finance survey attributed the increase in cash purchases relative to other means of financing as result of the large number of distressed properties available in the market and a decline in purchases from first-time homebuyers. Distressed properties are more likely to be bought with cash because they are at a lower valuation and do not require as much financing, and first-time homebuyers do not typically have enough cash on hand to buy homes with no financing. …

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