Powell said many times consumers can take tightening because loan distress is at historic lows. What consumers cannot take for long is raging inflation.
By Wolf Richter for WOLF STREET.
We’ll start with consumer bankruptcies because that’s where credit troubles, if they cannot be resolved, often end up. Then we’ll look at foreclosures, third-party collections, and delinquencies. What emerges is the picture of a consumer, still flush with pandemic money and rising incomes.
Consumer bankruptcies had plunged when the free money arrived, including the PPP loans, along with the various forbearance programs and the eviction bans. And the number of consumers with bankruptcies continued to drop to historic lows and have been hobbling along those historic lows for the last year-and-a-half.
In the third quarter, the number of consumers with bankruptcies inched up a tad from the second quarter, to 99,000, but was still below a year ago, according to data from the New York Fed’s Household Debt and Credit Report, and half of the already low levels of the Good Times (around 200,000):
Foreclosures dipped in the third quarter and have been at ultra-historic lows since the mortgage forbearance programs, where delinquent mortgages were put on ice, and no longer counted as delinquent. Most of the borrowers have now exited the forbearance programs, either by having the mortgage modified in some way, or by having sold the home and paid off the mortgage, which was easily possible amid the pandemic spike of home prices. The free pandemic money also helped.
Foreclosures, after ticking up for two quarters, ticked down again in Q3 to just 28,500 mortgages with foreclosures, thereby nixing the beginnings of a trend that had been forming. During the Good Times before the pandemic, there were about 70,000 mortgages with foreclosures, more than double the current number:
The portion of Consumers with third-party collections dropped to a new historic low in Q3, to just 5.7%, after a slight uptick in Q2. Third-party collections are registered on a consumer’s credit report when a lender sold a seriously delinquent account for cents on the dollar to a collection agency which will then hound the defaulter for some amount larger than what it had paid for:
Mortgage and HELOC delinquencies remained near historic lows. The 30-day-plus delinquency rate of mortgages ticked up to 2.1% (red line in the chart below), which was still far lower than before the pandemic. During the Good Times before Housing Bust 1, in 2005, the delinquency rate was 4.7%. During the Good Times before the pandemic, the delinquency rate was around 3.5%.
The 30-day-plus delinquency rate of HELOCs ticked down to 2.0%. This is right in line with the Good Times:
Mortgage balances have exploded because of the exploding home prices in recent years, even has home sales have plunged in 2022. In Q3, they reached $11.67 trillion:
But HELOC balances had been declining ever since HELOCs blew up during Housing Bust 1, and over the last year-and-a-half have crept along very low levels and haven’t come off those levels yet.
I expect that HELOC balances will gradually rise going forward because pulling cash out of home equity via a cash-out refi is very expensive now as the whole mortgage would come with current mortgage rates, not just the extra cash-out portion.
Credit cards and personal loans: I discussed credit card balances and delinquencies in much detail here. The 30-day-plus credit-card delinquency rate in Q3 rose to the pre-pandemic low of 5.2% of total balances (red line). The delinquency rate of “other” consumer loans, such as personal loans, rose to 5.8% and remains well below the pre-pandemic lows (green line):
Auto loans: I discussed prime and subprime auto loans & delinquencies in detail here. The 30-day-plus delinquency rate rose to 6.2%, still below the record lows before the pandemic.
Student loan delinquencies are no longer delinquencies, and student loans are practically no longer loans, as far as federal student loans are concerned, because no one is making payments on them, and everything is still on hold, and balances don’t accrue interest, which has just been extended further into mid-2023, and partial loan forgiveness has been promised but turns out to be hard to deliver as a battle in the courts has ensued.
The only student loans that are delinquent are those held by private lenders, and the overall delinquency rate – kind of an absurd notion with student “loans” these days – has plunged:
To portion of household loan balances deemed “current” (not delinquent) reached a record high in Q2 2021 of 97.3% of total household loan balances, and has remained at this record high ever since, including in Q3 2022.
These are the total loan balances from all types of loans – mortgages, auto loans, student loans, credit card balances, and other consumer loans – that are “current,” as a percent of total loan balances outstanding:
The Fed has already said that the consumer can take further tightening because consumer balance sheets are in great shape – Powell mentions this at every press conference – and loan distress is minimal and below historic lows. What consumers cannot take for long is raging inflation.
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