Mortgage debt falls by $900 billion

A number of recent reports tell us that things are looking up in the real estate market, the latest being that real estate debt is on the decline.

Figures from the Federal Reserve show that mortgage debt on one- to four-family residences reached $11.075 trillion in 2008. Now that number is down to $10.178 trillion. In other words, about $900 billion in mortgage debt has disappeared.

Saving money, reducing debt

These days, there are several factors contributing to the decline in mortgage debt:

1. Home prices: The value of the national housing stock has fallen. In 2005, residential real estate was worth $22 trillion, a sum which the Fed estimates was reduced to $16.4 trillion in the first quarter. People are paying less today than they would’ve paid five years ago for the same property
2. Mortgage rates:  Mortgage rates have fallen significantly. Lower mortgage rates mean smaller monthly payments
3. Refinancing: Record-low mortgage rates and an expanded HARP program have kept the recent refi boom alive. A borrower with a $200,000 loan refinancing from 5.5 percent to 4 percent will save nearly $150 a month
4. Loan modifications: The typical savings under the federal Home Affordable Modification Program (HAMP) is $536 a month

More debt reduction on the way?

There is currently a debate on Capitol Hill regarding whether to expand the HARP program to include even more borrowers, underwater or not. A proposed bill by Senators Robert Menendez (D-N.J.) and Barbara Boxer (D-Calif.) would greatly increase refinancing opportunities for a large number of homeowners.

What’s interesting about the proposed legislation is that it has impacts which go far beyond mortgage rates, loans and equity. If passed, more homeowners will be able to cut their monthly housing costs and that’s good for them — but also for the rest of us.

Why? Two reasons:

1. Money saved on mortgage payments will be money spent
2. Lenders accrue less risk

The reality is that 41 banks have failed so far this year. The financial sector becomes less risky as higher-rate mortgages are removed from the system–and that should mean easier loan access for the rest of us.