$8.4Trillion mortgage debt is no problem

I was reading my favourite European mortgage magazine (Mortgage Strategy of course) recently when I saw the editorial about UK mortgage debt surpassing the 1trillion mark. I laughed. 1trillion? Folks, you have nothing on your former colonies.

Let me tell you something about the US residential debt market. It’s big, bad and ugly. OK, maybe the bad and ugly adjectives don’t really apply although there are many consumer watchdog groups – non-profit organisations that claim to work for the little guy – that are alarmed at the growing debt of US consumers.

So how much mortgage debt have US consumers racked up? Figures compiled by the newspaper I work for – National Mortgage News – show US citizens owe roughly $8.4trillion on their home mortgages. That’s the principal amount they owe and does not reflect interest payments which, if the mortgage lasts for 30 years, can be three times the principal amount, or $25trillion. It sounds like a lot of money.

But here are a few facts that might put your mind at ease when contemplating mortgage debt, whether in the US or the UK. The average size of an outstanding loan in the US is $140,000. In today’s overheated housing market (which is now cooling) that doesn’t sound like much money. But the average loan size figure includes second loans – home equity lines of credit – and older, low-balance loans.

The latter are a curiosity. They tend to be mortgages that were taken out 15 or 20 years ago when house prices were a fraction of what they are today. Although the interest rates on these aged loans are higher than the prevailing rate of 6.5% many home owners have chosen not to refinance or repay.

From time to time I hear stories from loan servicers that have a bunch of these low-balance loans on their books. Typically they involve older couples who don’t see the point of refinancing or repaying their loans. Keep in mind that Americans are entitled to an annual tax deduction on their mortgage interest payments.

Another reason US executives are not fretting about mortgage debt is low delinquency rates. Americans may owe $8.4trillion but the late payment rate for A paper loans is about 3% and the foreclosure rate is a scant 0.44%. Again, these figures are courtesy of research by National Mortgage News. The numbers are averages based on figures collected by the top 100 residential loan servicers. These firms service mortgages in all 50 states and control 85% of the market.

Equity is another reason mortgage bankers aren’t losing sleep. Americans owe $8.4trillion on housing stock, single family homes, townhouses, co-operatives, and condominiums, estimated to be worth $16trillion or more. That’s a nice cushion.

Of course, there are plenty of consumers who can’t pay their bills and one alarming trend is the boom in outstanding sub-prime loans. At the end of March sub-prime mortgage debt totalled $1.3trillion compared with just $532bn in 2003. That’s a phenomenal growth of 240%.

And even though A paper loans have a low late payment rate, sub-prime delinquencies now top 9%. The foreclosure rate is 1.5% so there’s not much to worry about – but there could be. It depends on who you are and what type of mortgage we’re talking about.

The nice thing about the home lending business is that there’s an asset collateralising the mortgage. Servicers do not like to foreclose unless they have to. Foreclosures can be expensive and once all costs are factored in the servicer typically loses money on the deal.

So as long as home prices hold up the picture is bright. Then again, just as I was finishing this column, Merrill Lynch said that the US is in a bear market for housing and buyers, not sellers, will now have the upper hand for years to come. It’s been just the opposite for the past five years.

Still, prices aren’t crashing and despite all the talk of a housing bubble not one major housing market has gone pop.