The level of U.S. household debt relative to disposable income has been declining since the financial crisis. This household deleveraging is still continuing, according to the latest data. The deleveraging is taking place primarily because liabilities on home mortgages are falling. Nonmortgage liabilities have been flat since 2007.
The primary driver of declining mortgage balances is mortgage write-offs. Given the persistently high level of delinquency rates, mortgage write-offs are likely to remain high. Mortgage balances will drop further as result, unless purchase-mortgage originations pick up.
So far, purchase activity remains highly subdued. The most recent data show that originations are still close to the lowest levels seen during the crisis.
Refinancing activity has also been declining despite the historically low mortgage rates.
The obvious culprit is the lack of equity. Median price appreciation of the refinanced properties from the time the original loan was made to the time it was refinanced is -7.4 percent in the most recent Freddie Mac data. This suggests that the Fannie Mae and Freddie Mac are mostly refinancing underwater mortgages in their effort to revive the housing market. This opportunity to refinance without equity is not available to mortgages not owned by the two housing GSEs. Therefore, the overall refinancing activity is lackluster despite the low mortgage rates.
It is also worth noting that refinancing activity is not uniform across all market segments. Currently, around 80 percent of mortgage originations under the Freddie Mac loan limit are refinancings. In the broader market, the refinance share is around 60 percent. This observation also supports our earlier claim that the housing GSEs are more active in this market because they can refinance loans that would not qualify for a refinancing in the private market due to lack of equity or low credit score.
The nature of refinancing activity has also changed in the last few years. While cash-out refinancings were the most popular type of activity before the crisis, the current trend is to benefit from low rates without taking on new debt. This suggests that refinancings may not give a boost to consumption the way they did earlier in the last decade.