Meet the Author

Yuliya Demyanyk |

Senior Research Economist

Yuliya Demyanyk

Yuliya Demyanyk is a senior research economist in the Research Department of the Federal Reserve Bank of Cleveland. Her research focuses on analysis of the subprime mortgage market, on the roles that financial intermediation and banking regulation play in the U.S. economy, and on analysis of financial integration in the United States as well as in the European Union.

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Meet the Author

Matthew Koepke |

Research Analyst

Matthew Koepke

Matthew Koepke is a former research analyst in the Research Department of the Federal Reserve Bank of Cleveland.

11.22.10

Economic Trends

Mortgage Borrowers Deleverage

Yuliya Demyanyk and Matthew Koepke

The housing bubble that preceded the last recession left many borrowers overleveraged once the recession struck. According to the Board of Governors, from March of 2000 to September of 2007, the homeowner mortgage obligation ratio, which measures the outstanding value of mortgage payments as a percentage of disposable income, grew from 8.6 percent to 11.3 percent. However, since the peak of the last business cycle in 2007, consumers have begun to deleverage their balance sheets. This trend is evident in the housing market where consumers have been reducing their exposure to mortgage debt by financing more home purchases with cash and reducing both the loan-to-value ratios and the term to maturity of their mortgage debt.

For the month of September, cash was the number one source of financing for home purchases. According to the November 9 edition of Inside Mortgage Finance, which includes the most recent Campbell/Inside Mortgage Finance Monthly Survey of Real Estate Market Conditions, 30.5 percent of home purchases were financed with cash, up from 24.4 percent in January. The Campbell/Inside Mortgage Finance survey attributed the increase in cash purchases relative to other means of financing as result of the large number of distressed properties available in the market and a decline in purchases from first-time homebuyers. Distressed properties are more likely to be bought with cash because they are at a lower valuation and do not require as much financing, and first-time homebuyers do not typically have enough cash on hand to buy homes with no financing. For the month of September, real-estate-owned and short-sale transactions accounted for 47.5 percent of purchases. Additionally, purchases by first-time home buyers have declined since the expiration of the homebuyer tax credit. For the month of September, first-time home buyers accounted for 34.4 percent of all purchase transactions, down from 42.4 percent in June.

Consumers have been able to deleverage by reducing both the amount of debt and the term to maturity of their mortgage debt. Loan-to-value ratios have steadily declined since they peaked, falling 680 basis points for existing homes and 520 basis points for new homes. Moreover, consumers have reduced their exposure to mortgage debt by reducing the debt’s term to maturity. In June, 2007, the term to maturity of all loans closed was 29.5 years; however, as of September of the term to maturity of all loans closed was 27.6 years.

Borrowers have responded to the recent recession by reducing their exposure to mortgage debt. Since the recession began in 2007, the mortgage financial obligation ratio has declined 97 basis points, from 11.3 percent to 10.3 percent. While mortgages remain a much larger proportion of homeowners’ debt today than in 2000, if borrowers continue to deleverage, they will be able to obtain more manageable levels of debt in the future.