Serious debt

Debt, money

Debt, money

Housingwire reported Thursday that bank risk managers still believe that excessive levels of mortgage debt, student loan debt and credit-card debt are still a serious. In short, risk managers are significantly more pessimistic now than they were last quarter. And for good reason. Over the past 10 to 15 years, total debt outstanding in the US has grown as a much faster pace than population, and little has been done to deal with the debt in spite of widespread unemployment, flat personal income, and declining collateral values. According to this article in the Atlantic Monthly, student loan debt has grown more than 500 percent since 1999. Over a similar period, from 1998 to 2008, household credit-market debt has grown 140 percent. During this period, the US population grew about 10 percent. A similar curve can be observed for mortgage debt as well.  Some economists have made a big deal out the mild increase in the savings rate. This, however, does not show any big improvements either. The personal saving rate, at 3.5 percent during November, was tied at the lowest level seen since Janaury 2008. There was indeed a period following the initial crisis of late 2008 during which the saving rate hit 7.1 percent (during May 2009), but it has since steadily declined and has been below 4 percent for the past three quarters. This is likely as a result of ongoing efforts, through easy money policies, to keep the consumers spending.  And has it worked? Following a post-2008 drop that was similar to the drops in mortgage and credit market debt, consumer debt has been heading back up since the third quarter of 2010. Consumer debt is now about 5 percent below peak levels, following the initial drop, but has grown at about 3 times the rate of population over the past decade. The feds have managed to get consumer debt back up over the past 18 months or so. Has this increased spending been the result of increased employment and wages? Clearly not, since there are still at least 9 million unemployed Americans, and probably more.  Many of those continue to make payments on mortgages, credit card bills and student loans. How much longer this can continue in the fact of ongoing unemployment, underemployment, and underwater real estate remains to be seen, but it’s not difficult to see why the bank risk professionals suspect that more defaults may be on the horizon.  The economy will fix itself through a long and unpleasant period of deleveraging, but that appears to still be in the very early stages. Ongoing government interventions such as the homebuyer tax credits and continued efforts to push down interest rates continue to discourage saving and capital accumulation.  The one place we have seen a fair amount of deleveraging is in the mortgage markets as homeowners default, foreclose, and walk away, but the inventory there continues to be substantial, and declines in mortgage delinquencies may have stalled. During the 3rd Q of 2011, the percent of mortgage loans in foreclosure, according to the Mortgage Bankers Association, was flat from the second quarter, and it was up from the 3rd quarter of 2010. 4.3 percent of mortgage loans were in foreclosure during the 3rd Q of 2010, but 4.4 percent of them were in foreclosure during the same period this year. The overall trend is downward, but at a very slow pace.  Since one can’t get out of student debt through bankruptcy, and since many households use credit cards to balance household budgets, we could be looking at many years before present consumers begin to engage in some serious deleveraging of household debt. We certainly don’t seem to have seen much of it yet.

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