Are America's homeowners increasingly turning into debt junkies, cashing out their equity through serial refinancings and using equity credit lines to hock their real estate to the hilt?

That's a popular image, but new research suggests that it's only partially correct at best. Home equity levels have remained relatively constant for the past five years: The typical household had a 58 percent equity stake in their principal residence in 2000, and a 57 percent stake as of the third quarter of 2005. Mortgage debt has ballooned -- from about $5 trillion in 2000 to $11 billion in 2005. But so have home real estate values -- from $11 trillion five years ago to nearly $20 trillion last year.

So yes, homeowners are carrying a lot more debt (first mortgages, second mortgages and equity lines), but not as a percentage of their total real estate values.

People who have owned their houses longer and have older mortgages tend to have more equity, according to new research by First American Real Estate Solutions, a Santa Ana, California-based subsidiary of giant First American Corp. For example, 74 percent of all owners whose first mortgages date to 1985 now have 70 to 75 percent equity stakes. Sixty one percent of all homeowners whose loans date to 2000 have seen their equity stakes rise to between 35 and 40 percent.

But more recent home buyers have much less equity by comparison. After all, they've often had to stretch their budgets just to afford to buy the house with a modest down payment. They need at least several years of solid real estate price appreciation -- plus principal paydowns on their notes -- to begin to push up their equity levels.

First American researchers had access to that company's proprietary "Loan Performance" database, which contains ongoing details about millions of active home mortgage accounts, including nearly 20 million made during 2004-2005. More than one out of ten borrowers whose loans were originated in 2004 now have either zero equity or less in their properties. A sobering 29 percent of borrowers with loans closed in 2005 are in that position, according to First American. The company used its proprietary "automated valuation" models to come up with current market values of the homes it studied.

Those surprisingly high percentages of recent borrowers who have no equity is one of the inevitable side impacts of "interest-only" and "payment option" negative amortization mortgages that have been so popular in high-cost markets during the past two years.

By definition, interest-only loans require no paydowns of principal during their early years -- often 3 to 10 years. Negative amortization programs -- a key component of payment option loans -- allow borrowers to build up debt 10 to 15 percent beyond the market values of their homes during the early years. Neither type of loan is an equity builder; people who use them typically are hoping that price inflation will raise the market worth of their properties and thereby provide them equity growth.

Interest-only and payment-option plans accounted for 50 percent or more of all new home loans originated in high-cost markets last year, according to mortgage market estimates. Some -- but not vast numbers -- of those borrowers could be in financial jeopardy if property values decline and interest rates rise, according to First American economist Christopher L. Cagan, the principal author of the study.

But far larger numbers of them face the potential for "payment shock" -- a rapid jump in monthly payments when their loans "reset" to higher rates or shortened amortization periods in the coming years. So if you've got one of these loans, make sure you've got a strategy to handle your post-reset costs. Otherwise you could fall into default on payments and potentially lose whatever equity you've built up through price appreciation.

Published: February 27, 2006

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Kenneth R. Harney writes an award-winning, nationally-syndicated column on housing and real estate from Washington, D.C. He is also managing director of the National Real Estate Development Center, a professional education company. He is a past member of the Federal Reserve Board's Consumer Advisory Council, a committee that by federal statute reviews all Fed actions on home mortgage, consmer credit and banking industry regulation. He served as a member of the U.S. Department of Housing and Urban Development's Working Group on Computerized Loan Origination (CLO) systems, and is a member of the Editorial Board of the Fannie Mae Foundation's journal, Housing Policy Debate. He is the author of two books on mortgage finance and real estate.