U.S. consumers are piling up record mortgage debt.
The mortgage-debt-to-income level was at a record high Jan. 1, according to the Federal Reserve, and two refinancing waves this year only added fuel to the fire.
Lenders said no slowdown is in sight because they expect interest rates to continue to fall and home prices to rise, prompting borrowers to take out larger and larger mortgages.
Homeowners, whether buying a home or refinancing a loan, are increasingly consolidating their credit card debt into mortgage loans, which charge lower interest rates. Some lenders offer loans for up to 150% of a home's value, even for a purchase loan to a first-time buyer.
Nationwide, mortgage debt increased 8.5% from the first quarter of 1998 to the second and is expected to continue rising. "We will have a higher increase in 1998 than in a long time," said Brian Carey, an economist at the Mortgage Bankers Association of America.
Though hard numbers are scarce, lenders said borrowers are opting for bigger loan balances when they refinance.
"We're seeing borrowers take money out," said Sandy Robertson, regional vice president at Norwest Mortgage. "There are a lot of people out there advertising 125%-loan-to-value loans."
Consumers are also more willing to refinance now than they were in 1993, the last time interest rates dipped this low, Mr. Robertson said. "People aren't afraid to refinance, the process is a lot easier now," he said, and the press has made consumers more aware of the benefits.
Educated consumers know they can raise their loan-to-value ratios, Mr. Robertson said, and pay off bills. Norwest Mortgage advertises a debt consolidation product, and through its finance arm offers the 125% loan-to- value product.
Consumers are also opting for shorter-term loans when they refinance, Mr. Robertson said, which can drive up LTV levels.
Transferring high-interest rate credit card debt to a home loan is "good, not bad," said David Lereah, chief economist at the MBA.
In fact, a report issued by the General Accounting Office last week said that high-LTV lending, at its current level, poses no greater risk than credit card lending.
But the high level of mortgage debt could be a "ticking time bomb" if the economy suffers, Mr. Lereah said.
"In the long run, the mortgage market is taking on additional risk from the consumer installment market," said Mark Zandi, an economist at Regional Financial Associates, West Chester, Pa. "Lenders should realize that their business is a lot riskier today than it was 10 years ago."
The real test for the mortgage market will come four to five years from now, Mr. Zandi said, when loans originated this year begin to age, especially if the economy weakens.
"Housing prices are rising as fast as they have in 25 years, unemployment is low, but delinquency rates are drifting upward," he said.
