By Dennis Cauchon, USA TODAY
Americans are reducing mortgage payments at a record clip, directing cash that once went for debt into consumer spending and savings.
Low interest rates, defaults and refinancing have shaved more than $100 billion off the nation's annual mortgage bill — an amount comparable to all unemployment benefits for one year or this year's Social Security payroll tax cut.
"This is a form of economic stimulus that goes to Main Street rather than Wall Street," says Nicholas Carroll, a journalist on consumer finance and author of Walk Away From Debt for a Better Future. When freed from a mortgage payment, people's first purchases tend to be necessities, such as socks and underwear, he says.
Homeowners have trimmed interest payments alone by 11% — or $67 billion a year — from the peak in 2008, according to the Bureau of Economic Analysis (BEA). The savings come equally from grabbing lower interest rates and reducing what's owed by paying down principal or defaulting on loans.
The nation has slashed total mortgage debt from nearly $11 trillion at the mid-2008 peak to $10.3 trillion in the first three months of 2011, the BEA reports.
The trend shows no sign of slowing. About 9% of mortgage borrowers are behind on payments, and 4.6% of homes are in foreclosure, says the Mortgage Bankers Association.
Even so, homeowners are reducing mortgages far more slowly than they added to them during the housing bubble. Borrowers took on $1 trillion in new principal and $90 billion in extra interest in 2006 alone, BEA data show. Shrinking mortgage payments are a sign of the economy resetting in the housing bust's aftermath.
"No one remained untouched, not homeowners, Wall Street, investors or the government," says economist Sam Khater of CoreLogic, which tracks real estate trends. "One positive sign is that housing is becoming more affordable."
Economic effects of lower mortgage debt:
•Savings. For the first time since 1998, households are saving more than they're spending on mortgage interest.
•Interest. Mortgage interest consumes 5.27% of the nation's after-tax income, the lowest since 2004 and comparable to the 1980s and '90s.
•Rates. The average interest rate on all mortgages — not just new ones — has fallen for 16 consecutive quarters to 5.96%, the lowest since the government started keeping track in 1977. The tumbling rate reflects borrowers restructuring loans to become better credit risks and shortening 30-year mortgages to 15-year loans.
"Households are managing their debt down by bringing cash to the table to qualify for super-low rates," Mortgage Bankers Association economist Michael Fratantoni says. That's a change from the housing bubble when "cash-out" loans let borrowers leave mortgage signings with spending money, he says.
Consumers have started borrowing more for cars, appliances and other big-ticket items in the past two months but not for homes, Fratantoni says. "Consumers are cautious."