Forbearance Effect: Severe mortgage and student loan defaults plunge to all-time highs as overdue loans in forbearance do not count as past due.
Through Wolf Richter for LOUP STREET.
Our ever-amazing American debt slaves are still borrowing, mind you, but much to the dismay of the Fed, they’re reducing their debt where the banks and shadow banks are making a big pile of their money: credit cards and other rates. high interest debts such as personal lines of credit.
Total household debt – mortgages, HELOCs, credit cards, car loans, student loans, and other debt – rose $ 85 billion in the first quarter to $ 14.6 trillion, according to the New York Fed. Household debt and credit report Wednesday afternoon, based on data from Equifax.
But the point is, Americans paid off their credit cards in the first quarter of the second-largest amount on record, at $ 49 billion, behind just the $ 76 billion they paid in the second quarter of 2020. “The one of the most baffling changes in debt balances, “the New York Fed called it in a blog post. In the five quarters since the fourth quarter of 2019, the last full quarter of The Good Times, Americans have paid off their credit cards by $ 157 billion.
In the wake of the financial crisis, credit card balances also plunged, but they took much longer – four years, from Q4 2008 to Q4 2012 – and it’s not because consumers paid them off. , but because consumers defaulted, and those balances were written off.
This time around, there are waves of stimulus money, PPP loans, additional unemployment benefits, eviction bans, moratoriums on foreclosures, rent subsidies, and more. The government took a fire hose and sprayed the ground with cash, and suspended collection of some debts.
Many consumers have received the series of stimuli, starting in April 2020. For many of them it was extra money that suddenly appeared, and instead of putting it in a checking account where it didn’t. no use, some people have used it to pay off debt at usurious interest rates – a smart thing to do.
Some of the stimuli were also spent on merchandise as retail sales declined glorious unpublished WTF peak despite declining credit card balances:
The people who used their stimuli to pay off their credit cards and those who used their stimmies to help the WTF surge in retail sales may have been two separate groups of people with partial overlap.
People living in high-income zip codes paid off their credit cards more than people living in low-income zip codes, the New York Fed found, based on IRS data on tax levels. income by postal code and Equifax credit card balance data for those postal codes.
In high income postal codes (over $ 79,000), average credit card balances fell 19% over the year; in the lowest income postal codes (less than $ 46,000), average credit card balances declined by 15%:
The fact that the Fed is trying to disentangle this phenomenon of Americans actually paying off their usurious interest debts and depriving the banks of serious moolah shows just how serious this situation is.
Despite the stimuli and other public funds that are sweeping over consumers, the rate of serious delinquency (over 90 days late) has been high and in the first quarter reached 10% of total credit card balances, the highest rate. highest since 2013, according to data from the New York Fed. . But it remains well below the peak of the financial crisis of almost 14%:
Debt balances of “other” consumers have also declined.
The balances of personal loans, lines of credit and other loans from banks, shadow banks, peer-to-peer lenders, and payday lenders declined during the pandemic, after rising for years. This too was an effect of stimuli and other measures. In the first quarter, balances fell $ 6 billion from the previous quarter and $ 19 billion from the fourth quarter of 2019, to $ 413 billion:
Serious defaults over 90 days past due accounted for 7.7% of total balances, having risen steadily since the recent low in 2017, but remain below the peak during the financial crisis:
HELOC sales decline on a ten-year trend.
This is a long-term phenomenon that started in 2009 when people defaulted heavily on their HELOCs during the mortgage crisis, and it has continued unabated as people moved on to refits. withdrawal to take advantage of their home, rather than relying on HELOCs.
Balances fell $ 14 billion in the first quarter from the previous quarter and fell more than half since the 2009 high to $ 335 billion, the lowest since the first quarter of 2004:
Mortgage debt swells with house prices.
Mortgage debt jumped $ 120 billion in the first quarter, following a jump of $ 182 billion in the fourth quarter, fueled by record levels of mortgage originations and soaring prices for homes that require rising mortgages :
No mortgage at work: Serious delinquency drops to an all-time high.
Mortgage loans over 90 days past due declined to 0.59% of total mortgage balances, a new record high in the data.
This is because 2.2 million mortgages are still in arrears, according to the Mortgage Bankers Association, and those that are past due don’t count as delinquents in this data here, which comes from Equifax. The abstention programs have been extended.
Forbearance is also the reason credit scores rose during the pandemic: Credit bureaus do not count overdue debts that are past due as past due.
Also posted: HELOC (green line) delinquency rate climbed to 1.18%, but remains in the lower 12-year range:
Auto loans and rentals.
Soaring prices for new and used vehicles are causing soaring loan balances. Auto loan and lease balances rose $ 8 billion in the first quarter after jumping $ 14 billion in the fourth quarter and $ 17 billion in the third quarter, from a record over time except in the second quarter when loan balances fell while auto sales briefly collapsed:
Badly overdue auto loan balances have plummeted during the pandemic as stimuli have been used to catch up on car payments, but after rising for years, they remain high at 4.8% of total balances. At the height of the financial crisis, overdue balances peaked at 5.3%:
The student loan quagmire.
Last year, all government-backed student loans were automatically put into forbearance programs which have now been extended. And everyone is hoping for a loan forgiveness. As a result, few borrowers pay off their student loans.
And even like New student loans declined last year as many colleges could not charge for room and board, and some had to repay amounts already paid for room and board, student loan balances continued to rise, but at a slower pace. Then in the first quarter, student loan balances jumped $ 29 billion, in line with the first quarter of 2019.
Repayments were already minimal and had been declining for years. These low repayment rates in the past, based on the many programs available to borrowers to slow or delay repayments, have largely contributed to the increase in student loan balances even as college enrollment has declined every year since 2011.
Student loans that are automatically forborne do not count as past due in the Equifax data here, and so the severely past due student loan rate plunged in the second quarter of last year, when the The forbearance went into effect, and continued to decline, and the first quarter hit a record 6.2%, even as loan repayments stalled:
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