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Wealth effect fades as mortgage debt falls to five-year low

US mortgage debt, a driver of consumer spending during the real estate boom, dropped to the lowest level in almost five years in the third quarter as foreclosures wiped out home loans and housing purchases fell.

The volume of outstanding home mortgages declined to $9.88 trillion from $9.94 trillion at June 30, according to Federal Reserve data. The reading was the lowest since the end of 2006. Mortgage volume peaked at $10.6 trillion in early 2008, the final months of a decadelong borrowing binge.

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The mortgage lending that boosted spending and padded bank profits during the 2001 to 2006 surge in home prices is failing to aid the US economic recovery as the worth of real estate plunges, Doug Duncan, chief economist at Fannie Mae, said in a telephone interview from Washington. Outstanding home loan volume may drop “for at least another couple of years,’’ he said.

Plunging home values have counteracted the so-called wealth effect that spurred people to spend money as real estate values grew. Consumers spent about $677.3 billion, or about $113 billion a year, from home equity loans on purchases such as cars or televisions during the 2000 to 2005 real estate boom, according to a 2007 paper by former Fed chairman Alan Greenspan and Fed economist James Kennedy. Another $376.2 billion, or about $63 billion a year, went toward home renovations.

During the last five years, households may have cut spending even more than they expanded it during the real estate boom, Chad Wilkerson and Megan Williams, economists at the Kansas City Fed, wrote in a report earlier this year.

Lending for mortgages to purchase homes probably will fall to $80 billion in the fourth quarter, the lowest since 1991 and one-fifth the volume of a record high in mid-2005, according to the Mortgage Bankers Association in Washington. Home prices are down 31 percent from a July 2006 peak, based on the S&P/Case-Shiller home price index of 20 US cities.

Declining property values have wiped out more than $4 trillion in real estate wealth over four years, according to the Fed, and left almost one-third of US mortgage payers owing more than the value of their house, data from Zillow Inc. show.

Kenna Stormogipson, in Oakland, Calif., is one of those underwater borrowers. She said she’s stuck in a house she bought for $485,000 in 2005. “You can’t leave,’’ said Stormogipson, 31, a high school science teacher. “You can’t really spend money on anything else.’’

The duplex home, which has first and second mortgages totaling $462,000, would sell for about $200,000 today, she said. Loan payments took up more than half of her monthly $5,000 salary, she said. Stormogipson stopped making full mortgage payments because her lender wouldn’t agree to a loan modification.

“Negative equity is the big problem,’’ Stan Humphries, chief economist for Zillow, said in a telephone interview. “It’s hard to come up with a way to erase the negative equity that’s fair to homeowners who were going to continue to pay and in a way that doesn’t bankrupt either the banks or the taxpayer.’’

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