Magazine article Economic Trends

Household Debt

Magazine article Economic Trends

Household Debt

Article excerpt

10.27.11

The level of U.S. household debt relative to disposable income has been declining since the financial crisis. This household deleveraging is still continuing, according to the latest data. The deleveraging is taking place primarily because liabilities on home mortgages are falling. Nonmortgage liabilities have been flat since 2007.

The primary driver of declining mortgage balances is mortgage write-offs. Given the persistently high level of delinquency rates, mortgage write-offs are likely to remain high. Mortgage balances will drop further as result, unless purchase-mortgage originations pick up.

So far, purchase activity remains highly subdued. The most recent data show that originations are still close to the lowest levels seen during the crisis.

Refinancing activity has also been declining despite the historically low mortgage rates.

The obvious culprit is the lack of equity. Median price appreciation of the refinanced properties from the time the original loan was made to the time it was refinanced is -7.4 percent in the most recent Freddie Mac data. This suggests that the Fannie Mae and Freddie Mac are mostly refinancing underwater mortgages in their effort to revive the housing market. …

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