Americans Continue to Reduce Mortgage Debt

Americans are continuing to deleverage (reduce their level of debt) according to a report issued  by the Federal Reserve Bank of New York. 

While the change is not as dramatic as in previous quarters, 2010Q3 marks the eighth consecutive quarter that household debt has decreased. Americans have eliminated nearly $1 trillion of their obligations since debt hit its peak in the third quarter of 2008.  Credit availability and delinquencies are also down. 

The Quarterly Report on Household Debt and Credit covers five measures of debt; mortgage, credit card, revolving home equity (HELOC,) student loans, and auto loans.  Americans currently owe $11.6 trillion, with mortgages representing 74 percent of that debt; credit cards, auto loans, and HELOCs each represent 6 percent and student loans 5 percent.  

Americans began to reduce their mortgage debt in 2008 and by the end of last year that debt had declined by $140 billion, some of it due to defaults and charge-offs.  Now non-mortgage debt has also dropped for the first time since at least 2000.   The report said that this finding suggests that consumers have been actively reducing their debts, and not just by defaulting.

 "Consumer debt is declining but only part of the reduction is attributable to defaults and charge-offs," said Donghoon Lee, senior economist in the Research and Statistics Group at the New York Fed. "Americans are borrowing less and paying off more debt than in the recent past. This change, which we continue to study carefully, can be a result of both tightening credit standards and voluntary changes in saving behavior."

The number of open credit accounts has declined significantly.  During the four quarters ending September 30, 217 million accounts were closed while 158 million were opened.  Credit cards have shown the most significant declines, going from 381 million open accounts to 378 million during the third quarter.  Since the peak in Q3 2008, the number credit cards has declined 24 percent. During that same period limits on credit cards have gone from approximately $3.8 trillion to about $2.75 trillion while the utilization of available credit has increased from 23 to 26 percent. The balances on home equity lines of credit (HELOCs) have remained relatively flat at around $0.6 trillion while available credit has shrunk from approximately $1.5 trillion to about $1.25 trillion.  Student loan numbers have bucked the trend, rising from about 50 million accounts to 2008 to around 70 million today.  The level of indebtedness, however, has remained relatively flat.  The number of credit account inquiries rose for the second quarter in a row, an indication of consumer credit demand.

Mortgage originations rose 4.3 percent during the quarter to $380 billion.  This was 26 percent higher than the low point in 2008Q4. New auto loans also rose and are now nearly 43% above the 2009Q1 nadir.

Household delinquency rates declined for the second consecutive quarter to 11.1 percent of all debt at the end of September compared to 11.4 percent on June 30 and 11.6 percent one year ago.  Delinquent balances of consumer debt are down 8.2 percent and serious delinquencies have fallen 4.6 percent.

About 2.7 percent of mortgages that had been current became delinquent during the quarter but transitions from early (30 to 60 day) delinquent to serious (90+ days) fell slightly from 33 percent to 32 percent.  Transitions from early delinquency to current also fell.  Nearly a half million individuals had a foreclosure notation added to their credit reports during the quarter; down 5.5 percent from the previous quarter and new bankruptcies also fell by 16 percent.

Data on selected states showed substantial variation.  In California, for example, per capital debt was nearly $80,000, three-quarters of which was mortgage debt while in Michigan individuals owe around $38,000, of which two-thirds was first mortgage debt.  Texas had a higher proportion of credit card debt than the other states in the sample but by far the smallest portion of debt attributable to HELOCs. Delinquency rates are consistent with every other study, with Nevada, Florida, Arizona, and California having the higher proportion of both early delinquencies and serious delinquencies.

A supplement to the report explores whether or not the data indicates that consumers have actually become more frugal.  The authors say that the answer as regards non-mortgage debt is simple; yes.  After stripping charge-offs out of the data, one can see that Americans were borrowing an average of $200 billion every year from 2000 to 2007.  Since then non-mortgage borrowing has dropped dramatically reaching a negative $13 billion in 2009 so it does indeed appear to be a change in behavior.

Mortgage debt is harder to quantify because of the rise in foreclosures and the drop in housing prices.  However, the change in net mortgage balances (first lien originations minus normal payoffs) dropped from just under $1 trillion a year in 2007 to about $400 billion in 2009.  This reflects the declining prices as a house is sold from one owner to another and the opening of new first mortgages for purchases. 

A second data set shows a steady decline in changes in the balances due to amortization, refinances, and junior lien balance changes. This number has declined from an average of $130 billion per year from 2000 to 2007 to a negative $140 billion by the end of 2009.  This indicates that, while consumers were extracting equity and increasing their mortgage debt until 2007, they have started to pay down that debt since then.

Charge offs of mortgage debt has totaled around $600 billion between 2007 and 2009.

The study concludes that the numbers for mortgage and non-mortgage debt indicate a change in consumer behavior going beyond delinquency and default.  "While borrowing contributed an annual average of about $330 billion to consumer cash flow between 2000 and 2007, consumers reduced their cash flow by $150 billion to reduce these debts.  This represents a $500 billion change in cash flow in just two years.

  The question however remains whether this new frugality is a result of consumer choice or are they being forced to pay down debt as credit standards have tightened.  The study's authors say they intend to explore this in coming months.