Fed Report Shows Decrease in Household Debt and Delinquencies

There is good news about Americans and their debt in a quarterly report issued by the Federal Reserve Bank of New York's Consumer Credit Panel; keeping in mind, of course, that everything is relative.  For example, aggregate consumer debt and household delinquency rates, while still in abysmal territory, both declined during the second quarter of 2010.

The report uses detailed Equifax credit report data to construct a longitudinal quarterly panel of individuals and households covering the period 1999 to 2009.  The panel is a nationally representative 5 percent sample of individuals with social security numbers and an Equifax credit history.  The survey includes all individuals sharing the panel members' address, allowing the survey designers to construct household-level debt for a representative sample of US households.  The database that results from the survey's design includes approximately 40 million individuals each quarter.  To reduce costs, a further 2 percent sample is taken for analysis resulting in a final sample of 240,000 individuals.

The study distinguishes debt across the following types of accounts:  mortgage accounts (including home equity installment loans (HEL)), home equity revolving accounts (HELOCs), auto loans, credit cards, student loans, and other loan accounts including consumer finance, retail stores and gas station accounts.

As of June 30, American consumers owed $11.7 trillion, down 1.5 percent from the previous quarter and 6.5 percent below the peak level for consumer debt ($12.5 trillion) at the end of the third quarter of 2008.  This downward trend has now continued for seven quarters.

Mortgage indebtedness has declined 6.4 percent since its peak, also in Q3 of 2008.  HELOCs were down 4.4 percent since peaking in late 2008 and early 2009.  Consumer indebtedness exclusive of mortgage and HELOC accounts was down 1.5 percent from the previous quarter and now totals $2.31 trillion, a decrease of 8.4 percent from the 2008Q3 peak.

On a state-by-state basis, the highest per capita debt load is in California followed by Nevada, and New Jersey.  Those three states also lead the nation in the highest mortgage debt loads and highest rate of delinquent consumer debt.

Approximately 272 million credit accounts were closed over the four quarters ending June 30 and 161 million accounts were opened.  Credit cards have accounted for most of the net reduction in accounts over the past two years and fell 4 million to 381 million open accounts during the second quarter.  The number of credit card accounts has dropped steadily since reaching a peak of nearly 500 million open accounts in mid-2008.  The increase in credit inquiries in the first half of 2010, however, indicates that demand for credit may be ticking up.

Household delinquencies declined during the quarter for the first time since early 2006.  At the end of the quarter 11.4 percent of outstanding debt was in some stage of delinquency, down from 11.9 percent at the end of the first quarter.  Currently about $1.3 trillion of consumer debt is delinquent and $986 billion is at least 90 days in arrears.  Delinquent balances are 2.9 percent lower than one year ago, but serious delinquencies have increased 3.1 percent.

About 496,000 individuals had a foreclosure notation added to their credit report during the quarter, up 8.7 percent from Quarter One and about 2.6 percent of mortgages that were current at the beginning of the quarter were no longer so at the end.  Better news was that the number of early delinquencies that transitioned into serious status improved sharply, from 39 percent to 33 percent and the cure rate - transitions from delinquent to current - rose to nearly 30 percent.  Both standards, however, remain at what the report termed "unfavorable levels by pre-crisis standards."

Bankruptcy filings during the quarter, reached 621,000.  This is the highest rate for filings since the Bankruptcy Reform Act of 2005 went into effect.  The report states that there is typically an increase in filings between the first and second quarter each year but usually in the vicinity of 20 percent rather than the 34 percent first-to-second quarter increase this year.

Mortgage originations fell 4.1 percent to $364 billion but were still over 20 percent above the low reached at the end of 2008.  Mortgages are being originated at less than half the average rate in the 2003-2007 period.