Debt-Addicted Americans Are Relapsing, and Lenders Are There to Serve



Several consumer spending reports this month have shown that Americans are spending more — and, as usual, they are fueling that spending with debt.

When consumers start borrowing after a period of lull, it begs questions like why are they borrowing and how much? More importantly, will they be able to pay it back, or are we staring at another massive debt trap? The increase in household indebtedness in the last year was the highest since 2008, a $419 billion gain, according to a Federal Reserve Bank of New York (FRBNY) report. Most of this new debt came in the form of auto, home, and student loans.

Total consumer indebtedness as of March 31 was $11.65 trillion, the report said. In spite of the massive incremental rise in debt, the total is still 8.1 percent below the peak of $12.68 trillion clocked in the third quarter of 2008.

Like always, mortgages continue to be the biggest chunk of household debt, and it’s the size of expansion that can be unnerving given that the financial crisis was primarily a case of reckless sub-prime lending. Mortgage balances grew $233 billion in the year ended March 31, 2014, the largest year on year increase since 2008, FRBNY data shows.

On the bright side, credit card users and issuers have gotten wiser. Credit card balances are down by $24 billion, and the share of credit card debt as a portion of total household debt stayed flat at 6 percent. At 5 percent, the delinquency rate is back to what it was in 2003 after having risen up to 13 percent.

Better yet, FRBNY data shows delinquencies on all types of loans are down to 6.6 percent of total outstanding loans from 8.1 percent last year. The 90-plus day delinquency rate — loans where repayment is delayed by 90 days after the due date — is down to 4.8 percent, the lowest since 2008.

People are taking on more mortgage debt, but the delinquency rate on mortgages is on a steady decline. According to Mortgage Bankers Association’s National Delinquency Survey, the delinquency rate on mortgages for one- to four-unit houses is down to 6.11 percent, the lowest since 2007, and the number of loans in foreclosures is down 0.9 percent as a portion of all loans from last year, again the lowest since 2008.

Regulatory tightening and mortgage-related litigations that lenders have faced post-2007 explain this decline. Fear of regulatory reprimand and fines forced banks to improve standards for due diligence before approving loans. Banks have had to pay through their noses to settle cases of mortgage mis-selling.

As the dust settles on the mortgage crisis, student debt has emerged as the next big challenge. The demand for student loans has continued to grow consistently through the recession post-2007 to the present day. The number of student borrowers has increased by 70 percent between 2004 and 2012, and the size of borrowing per person has also gone up by 70 percent, FRBNY data show.

According to The Wall Street Journal, the top seven lenders to students in the country issued loans worth $6.9 billion in 2013, a rise of 8.1 percent from the previous year. Sallie Mae, one of the largest lenders to students, originated $3.8 billion of private student loans in 2013, up 14 percent from the previous year. Wells Fargo reported a rise of about 6.5 percent to nearly $1.6 billion last year.

Yet private student loans are only a very small portion (13.9 percent) of the total student loan deck. The government services the rest of the $1.2 trillion student loan market.

Risk from the education loans portfolio is a big issue that the system has over looked so far. Even as the student loan balances have reached $1.11 trillion, a rise of $125 billion over a year, the delinquency rate at 11 percent is the most perturbing among the four broad components of debt.

The risk is largely being borne by the federal government so far. According to MeasureOne, a student loan research company, the default rates for private loans were much lower, at 3.03 percent, from the seven largest lenders in 2013 against 3.81 percent the previous year. The reason for such a difference is that the federal loans have looser underwriting standards compared to private lenders. The government may not check the credit scores of applicants on some of the loans. The idea is to provide access to credit to students who have financial challenges.

The shift of demand for credit from mortgage to productive cores like education is a positive shift, and if the job markets improve, as the general expectation is, we may be able to handle the debt situation. At least that is the bet lenders are ready to take.

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