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U.S. mortgage debt, a driver of consumer spending during the real estate boom, dropped to the lowest level in almost five years in the third quarter as foreclosures wiped out home loans and housing purchases fell.

The volume of outstanding home mortgages declined to $9.88 trillion from $9.94 trillion June 30, according to Federal Reserve data released Thursday. The reading was the lowest since the end of 2006. Mortgage volume peaked at $10.6 trillion in early 2008, the final months of a decade-long borrowing binge.

The mortgage lending that boosted spending and padded bank profits during the 2001 to 2006 surge in home prices is failing to aid the U.S. economic recovery as the worth of real estate plunges, Doug Duncan, chief economist of mortgage-financier Fannie Mae, said in a telephone interview. Outstanding home-loan volume may drop "for at least another couple of years," he said.

"Consumers are still leveraged well above average," Duncan said. "That has to be worked off before you'll see a return of robust consumption."

Declining property values have wiped out more than $4 trillion in real estate wealth over four years and left almost a third of U.S. mortgage payers owing more than the value of their house. The 29 percent of mortgaged homeowners who were underwater on their loans in the third quarter is up from 23 percent a year earlier.

Kenna Stormogipson of Oakland is one of those underwater borrowers. She said she's stuck in a house she bought for $485,000 in 2005.

"You can't leave," said Stormogipson, 31, a high school science teacher. "You can't really spend money on anything else."

The duplex home, which has first and second mortgages totaling $462,000, would sell for about $200,000 today, she said. Loan payments took up more than half of her monthly $5,000 salary, she said.

Stormogipson stopped making full mortgage payments six months ago because her lender wouldn't agree to a loan modification. This Christmas, she's going to make gifts at home, such as soap and craft items.

"Negative equity is the big problem," Stan Humphries, chief economist for Zillow, said in a telephone interview. "It's hard to come up with a way to erase the negative equity that's fair to homeowners who were going to continue to pay and in a way that doesn't bankrupt either the banks or the taxpayer."

Market Data Provided by Bloomberg News

December 09, 2011|John Gittelsohn and Kathleen M. Howley, Bloomberg News