Housing Slump Causes Spike in Consumer Debt Delinquencies

by Jason Simpkins

Delinquencies on home-equity loans reached their highest level in 18 months in the first quarter of this year, the latest confirmation that the nation’s once-thriving housing market has pummeled consumers.

The American Bankers Association, in its quarterly report on consumer debt, said that credit-card delinquencies decreased during the first three months of the year. In the same period, however, there was an increase in delinquencies in every one of the categories the ABA tracks related to home ownership.

“I worry we will not get through the housing slump until late this year, which means more pressure on individuals to meet home payments and other obligations,” said James Chessen, the chief economist of the ABA.

The ABA data is based on surveys it conducted of 300 banks nationwide.  Payments are characterized as delinquent if they are 30 days or more past due.
According to the report, credit card loan delinquencies were 4.41% in the first quarter, a decline from 4.56% in the fourth quarter of 2006.

But housing-related delinquencies rose across the board:

  • Home equity loan delinquencies rose from 1.92% in the fourth quarter to 2.15% in the first quarter.
  • Mobile home loans rose from 2.82% to 2.94%.
  • And home equity lines of credit rose from 0.57% to 0.60%.

The Long Term Impacts of A Troubled Housing Market

Chessen’s outlook is rightly bleak, and is corroborated by the rise in the composite delinquency rate, which tracks eight different loan categories.  In the first three months of this year, that composite rate rose to 2.42%, its highest since the 2001 recession.

What’s not as clear is whether or not the U.S. economy is headed for a repeat performance of that downturn.

After a five-year boom, the housing market tanked last year, devastating some homeowners – particularly those with less-than-perfect credit histories and mortgages with “re-set” features that stepped up their debt-service expenses.

Late payments and new foreclosures for those borrowers spiked to all time highs according to a separate survey by the Mortgage Bankers Association released last month. In the report it was estimated that lenders began foreclosure actions against 1 out of every 172 U.S. mortgage borrowers in the first quarter, a record pace.

This spike in foreclosures was really bad news for the sub-prime mortgage business, which catered to the risky end of the home-borrowing market. The fallout from that is still being felt, and the pain is being felt all the way to Wall Street: Two hedge funds operated by investment bank Bear Stearns were heavily invested in subprime loans and nearly collapsed as a result.

The investment bank has announced it will provide $3.2 billion in bailout money for the one fund, but is so far refusing to bail out the second – a stance that’s certain to spawn a horde of nasty lawsuits by investors who feel they were blindsided and are seeking to recoup some of their losses.

None of this is good news for the $10 trillion U.S. economy, which grew at an ultra-anemic 0.7% in the first quarter, the worst showing in more than four years. Consumer spending accounts for 60%-70% of all economic activity, a lot of it aided by debt.

In the past few years, soaring home prices have enabled consumers to go out on a spending binge. But the subsequent housing-market meltdown – coupled with a big spike in energy prices – has been a major drag on the economy.

The ABA report did contain one silver lining, however: Consumers are continuing to pay down their credit-card debt – at least for now. The worry is that sputtering home payments could spread like flu, infecting other types of consumer-debt payments down the line.

Said the ABA’s Chessen:  “There are still signs of consumer financial distress which will continue throughout most of this year as the worst of the housing problem works its way through the economy.”

With the recovery of the still-troubled housing market moving along at a snail’s pace, the longer the downturn lingers, the more dangerous it becomes to consumer spending.