WE’RE HEARING while mortgage debt outstanding fell sharply in the wake of the Great Recession, a gradual turnaround is likely on the horizon.
To recap, MDO peaked at $14.8 trillion in the second quarter of 2008, according to the Federal Reserve Board. That slipped to $13 trillion at the end of the second quarter of this year, a decline of 12% over the past five years.
Single-family (one-to-four unit) mortgage debt fell from $11.2 trillion in 2008 to $9.8 trillion mid-way through 2013.
Separately, data released by Equifax last week suggests that MDO growth continued to slip in the third quarter. Equifax also said that residential, first-mortgage debt in October was down 1.7% compared to the year earlier level. (On the positive side, Equifax said that volume of seriously delinquent first mortgages fell to its lowest level in more than five years.)
And the Fed data show the rate of decline in MDO has slowed in recent quarters, and housing market trends suggest it could start growing again soon.
Multifamily mortgage debt has actually risen in recent years, which shouldn’t surprise anyone who has witnessed the boom in apartment construction in many parts of the country. The Fed’s data shows that mortgage debt secured by structures of five or more units rose from $844 billion in 2009 to $885 billion this year.
Another area of mortgage debt that hasn’t declined is farm loans. In fact, farm mortgage lending has grown dramatically since 2009, rising from $138 billion at the end of 2009 to $167.2 billion in the middle of this year.
The Mortgage Bankers Association is projecting that home loan origination volume will fall sharply next year, but that’s entirely the result of lower refinancing volume. The MBA predicts that home purchase lending, which could add to MDO, will increase next year. In its monthly mortgage finance outlook, the trade group that home purchase lending will grow from $661 billion this year to $723 billion next year, and continue growing into 2015. Home purchase lending tallied in at $587 billion in 2012. MBA Chief Economist Jay Brinkmann said in a news release that stronger home sales volume and rising home prices will drive the increase in purchase volume.
Peter Muoio, chief economist at Auction.com, told me he expects to see a turnaround in mortgage debt outstanding by this time next year. Historically, he said increases in home sales and home prices have been a good indicator of MDO growth, and both have turned positive already.
“When you look now, prices are on their way up; sales are on their way up, so our expectation is that relationship will assert itself and that will help with mortgage debt,” Muoio said. “Next year will be the nexus point for it turning positive.”
However, tighter mortgage underwriting standards, damaged credit ratings among consumers, and the number of homeowners who remain underwater on their mortgages all could be a drag on MDO growth in the near term.
Those trends are holding back the cash-out refinancing, which also contributed to MDO growth in the past. In recent years, homeowners often reduced their debt when refinancing.
“With that part missing, it’s going to take a little bit longer,” Muoio said.
There is also the prospect that the Fed’s anticipated “tapering” of its program to buy mortgage bonds and keep interest rates low may dampen the housing market. But Muoio said incoming Fed Chairwoman Janet Yellen will likely be cautious about making major policy changes early in her tenure. Recent Fed meeting notes suggest that tapering could begin in 2014, however.
And while tapering could lead to hiccups in the housing recovery, it should not derail the recovery altogether, Muoio believes. Employment growth and improved economic confidence should help sustain the housing recovery, though the process of recovering from a “major dislocation” is often bumpy.
“Our view on the housing market recovery is that it’s not a straight line up,” he said. “The housing market is going to have its ups and downs. We should expect that.”
Ted Cornwell has covered the mortgage markets since 1990. He is a former editor of both Mortgage Servicing News and Mortgage Technology.
