Mortgage Debt at Lowest Level Since 2006, Despite Increase in Originations

Despite a sizeable increase in consumer debt overall household debt fell by $74 billion in the third quarter of 2012, driven largely by a decrease in mortgage and home equity loan balances. The Federal Reserve Bank of New York's Quarterly Report on Household Debt and Credit reported that a drop of $120 billion in mortgage debt and $16 billion in home equity lines of credit were partially offset by a 2.3 percent increase in non-real estate obligations.

The drop in aggregate consumer debt continued a near-four year downward trend.  At of the end of the quarter (September 30) total consumer indebtedness was $11.31 trillion, 0.7 percent lower than in the second quarter and $1.37 trillion less than the peak household debt hit in the third quarter of 2008.

Mortgage debt, the largest component of the aggregate, now stands at $8.03 trillion, down 1.5 percent from the previous quarter and the lowest level since 2006.  The decline has come in spite of the fourth consecutive increase in mortgage originations with $521 billion in new mortgage debt appearing on consumer credit reports. 

The other major components of debt increased.  Student loan debt increased by $42 billion to $956 billion.  The Federal Reserve reports, however, that of the $42 billion only $23 billion is new debt while the remaining $19 billion is attributed to previously defaulted student loans that have been updated on credit reports this quarter, increasing the 90+ day delinquency rate for student loans to 11 percent.

Outstanding balances on auto loans increased by $18 billion to $768 billion, the highest level in nearly four years and the sixth quarter this debt has increased.  Originations increased by 4.4 percent to $85.8 billion, the third consecutive quarterly increase.        

Credit card balances were up $2 billion while aggregate credit card limits were down 0.3 percent or $9 billion during the quarter.  There are 382 million open credit card accounts, down slightly from the second quarter, while the number of credit inquiries decreased by one million to 167 million over a rolling six month period.

"The increase in mortgage originations, auto loans and credit card balances suggests that consumers are slowly gaining confidence in their financial position," said Donghoon Lee, senior economist at the New York Fed. "As consumers feel more comfortable, they may start to make purchases that were previously delayed."

Overall, delinquency rates improved slightly in the third quarter to 8.9 percent of outstanding debt compared to 9.0 percent in the second quarter.  This equates to about $1.01 trillion of delinquent debt, approximately $740 billion of which is seriously delinquent, i.e. 90+ days past due.

The percentage of auto loan debt that is seriously delinquent was unchanged at 4.2 percent while student loan debt, as noted above, rose to 11 percent.  Delinquency rates for mortgages decreased from 6.3 percent to 5.9 percent and new foreclosures are returning to their pre-crisis levels with new foreclosure notices added to 242,000 consumer credit reports. This was the lowest number in nearly six years.  Home equity lines of credit delinquencies remain high by historical standards at 4.9 percent.

Delinquency transition rates for current mortgage accounts were roughly unchanged, with 1.9% of current mortgage balances transitioning into delinquency. However, the rate of transition from early (30-60 days) into serious (90 days or  more) delinquency increased to 26.3%, up by 2.8 percentage points from the second quarter.  Furthermore, the cure rate - the share of balances that transitioned from 30-60 days delinquent to current - saw a second consecutive decline to 26.4%.

About 354,000 consumers had a bankruptcy notation added to their credit reports in 2012Q3, a 16.3% drop from the same quarter last year, and the seventh consecutive drop in bankruptcies on a year-over-year basis.