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NY FED’S HOUSEHOLD DEBT REPORT: IMPROVEMENT, BUT STILL A LONG WAY TO GO

A new quarterly report from the NY Fed highlights the situation in household debt (see the full report here):

Aggregate consumer debt continued to decline in the second quarter, continuing its trend of the
previous six quarters. As of June 30, 2010, total consumer indebtedness was $11.7 trillion, a reduction of
$812 billion (6.5%) from its peak level at the close of 2008Q3, and $178 billion (1.5%) below its March
31, 2010 level.

The number of open credit accounts continued to decline, although at a somewhat slower rate, during
the quarter. About 272 million credit accounts were closed during the four quarters that ended June 30,
while 161 million accounts were opened. The number of credit account inquiries within six months – an
indicator of consumer credit demand –ticked up for the first time since 2007Q3. Credit cards have been
the primary source of the reductions in accounts over the past two years, and during 2010Q2 the number
of open credit card accounts fell from 385 to 381 million. Still, the number of open credit card accounts
on June 30 was down 23.2% from their 2008Q2 peak.

Household mortgage indebtedness has declined 6.4%, and home equity lines of credit
(HELOCs) have fallen 4.4% since their respective peaks in 2008Q3 and 2009Q1. Excluding mortgage
and HELOC balances, consumer indebtedness fell 1.5% in the quarter and, after having fallen for six
consecutive quarters, stands at $2.31 trillion, 8.4% below its 2008Q4 peak.

For the first time since early 2006, total household delinquency rates declined in 2010Q2. As of June
30, 11.4% of outstanding debt was in some stage of delinquency, compared to 11.9% on March 31, and
11.2% a year ago. Currently about $1.3 trillion of consumer debt is delinquent and $986 billion is
seriously delinquent (at least 90 days late or “severely derogatory”). Delinquent balances are now down
2.9% from a year ago, but serious delinquencies are up 3.1%.

About 496,000 individuals had a foreclosure notation added to their credit reports between March 31
and June 30, an 8.7% increase from the 2010Q1 level of new foreclosures. New bankruptcies noted on
credit reports rose over 34% during the quarter, from 463,000 to 621,000. While we usually see jumps in
the bankruptcy rate between the first and second quarter of each year, the current increase is higher than
in the past few years, when it was around 20%.

Mortgage originations fell another 4.1% between 2010Q1 and 2010Q2, to $364 billion. While
mortgage originations in 2010Q2 were 20.6% above their 2008Q4 trough, they remain more than 50%
below their average levels of 2003-2007. Auto loan originations rose sharply – 25% – in the second
quarter, and were nearly 32% above their trough levels of 2009Q1. Still, auto loan origination balances
remain well below their levels of 2005-2006.

About 2.6% of current mortgage balances transitioned into delinquency during 2010Q2, continuing
the decline in this measure observed over the last year. Transitions from early (30-60 days) into serious
(90 days or more) delinquency improved sharply in 2010Q2, falling from 39% to 33%, the lowest rate of
deterioration since 2008Q2. Nonetheless, despite recent improvements in this rate and the “cure” rate –
transitions from delinquency to current status, which rose to nearly 30% – both remain at very
unfavorable levels by pre-crisis standards.

While many of the national trends described here are present in most areas of the country, the data for
selected states and for the twelve Federal Reserve Districts indicate substantial heterogeneity. For
example, data for Arizona, California, Florida and Nevada continue to indicate higher than average
delinquency and foreclosure rates. The accompanying charts provide graphic representations of the
national data and, for selected series, the underlying geographic variation.

Cullen Roche

Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC.Orcam is a financial services firm offering asset management, private advisory, institutional consulting and educational services.He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance and Understanding the Modern Monetary System.
Cullen Roche

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