Consumer Credit Expands, but HELOCs Continue Their Decline

Household debt outstanding rose for the first time in two years. According to data released by the Federal Reserve Bank of New York, household debt grew by $31.0 billion in the fourth quarter of 2012. The quarter-on-quarter not seasonally adjusted growth in household debt reflected an expansion in outstanding mortgages, auto loans, credit cards, and student loans. In the fourth quarter of 2012, these household debt products rose by a combined $41.0 billion. However, these gains were partially offset by a $10.0 billion decline in home equity lines of credit. Since increasing by $41.2 billion in the first quarter of 2011, total household debt outstanding experienced six consecutive quarters of declines, falling by $444.4 billion over that time span.

Outstanding balances on home equity lines of credit (HELOCs), which, along with home equity loans, were an important source of bond market growth, expanded significantly between 2003 and 2009. As Chart 1 illustrates, the outstanding amount of HELOCs totaled $242.0 billion in the first quarter of 2003, this amount was 37.8% of the outstanding amount of auto loans and 35.2% of the outstanding credit card debt. However, by the second quarter of 2009, the outstanding amount of HELOCs nearly tripled, growing by 194.6% to $713.0 billion. Over this same period, auto loans outstanding, $743.0 billion in the second quarter of 2009, rose by 15.9% while credit card balances, $824.0 billion, grew by 22.5%. Since the second quarter of 2009, the outstanding amount of HELOCs has contracted by 21.0% while credit card debt outstanding has fallen by 17.6%, although it rose in the latest quarter. The amount of outstanding auto loans, which returned to sustained growth in the second quarter of 2011, is now 5.4% above its second quarter 2009 level.

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The number of HELOC accounts also experienced a period of rapid growth. However, despite the rise in the number of HELOC accounts between first quarter of 2003 and the first quarter of 2008, the number of these accounts remained well below the number of auto loans and the number of credit card accounts. In the first quarter of 2008, there were 24.2 million home equity line of credit accounts, 80.8% greater than the number of accounts in the first quarter of 2003. Over this same period the number of auto loan accounts, 87.2 million in the first quarter of 2008, rose by 18.6% and the number of credit card accounts, 474.6 million in the first quarter of 2008, grew by 1.0%. However, at its peak in the first quarter of 2008, the number of HELOC accounts was only 27.8% of the number of auto loan accounts and 5.1% of credit card accounts.

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The growing amount of outstanding HELOCs was concentrated in a relatively smaller number of accounts. Despite the 80.8% increase in the number of HELOC accounts between the first quarter of 2003 and the first quarter of 2008, the outstanding amount of HELOCs rose by 174.0% over this same period. As a result, growth in the outstanding amount of HELOCs raised the size of the average account balance. As Chart 3 illustrates, growth in the balance on the average HELOC account, which generally tends to be larger than balances on other consumer financial products, eclipsed account balance growth of both credit cards and auto loans. Between the first quarter of 2003 and the first quarter of 2008, the average account balance on a HELOC account grew by 51.6% to $27,351. Meanwhile, the average auto loan and credit card balance, which grew by 6.3% and 20.4% over this same period, were $9,266 and $1,764 in the first quarter of 2008. In the fourth quarter of 2010, the average balance on a HELOC account peaked at $31,619, 3.6 times the average auto loan account balance and 4.6 times the average credit card account balance. However, since the fourth quarter of 2010, the average balance on a HELOC has declined somewhat, falling by 4.6% over the two year period.

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Data from the Federal Reserve Bank of New York that is displayed in the graph shown on page 9 of their report depicts the serious delinquency rate for HELOCs as being the lowest of household debt products. However, the current rate partly reflects that it started from a very low level. Instead, comparing the serious delinquency rate in each quarter relative to its level in the first quarter of 2003 conveys the magnitude of serious delinquencies in HELOCs. As chart 4 illustrates although most household debt products have begun the healing process, HELOCs still languish.

In the fourth quarter of 2007, the percent of outstanding HELOCs that were seriously delinquent was 3.8 times its level in the first quarter of 2003. By the second quarter of 2009, the percent of outstanding HELOCs that were seriously delinquent rose to 11.3 times its first quarter 2003 level. Between the first quarter of 2010 and the third quarter of 2012, the percent of outstanding HELOCs that was seriously delinquent rose from 11.6 times its first quarter 2003 level to 14.1 times its first quarter 2003 level. The percent of outstanding HELOCs that are seriously delinquent fell to 9.9 in the fourth quarter of 2012. However, according to the Federal Reserve Bank of New York, the decline in the delinquency rate that occurred in the fourth quarter of 2012 “can be attributed in large part to unusually high charge-offs of delinquent home equity lines of credit”. Meanwhile, in the first quarter of 2010, the percent of outstanding mortgage debt that was seriously delinquent peaked at 7.3 times its first quarter 2003 level, but has since fallen to 4.6 times its first quarter 2003 level. Over this same period, the percent of auto loans that were seriously delinquent declined from 2.2 times its first quarter 2003 level to 1.7 times its first quarter 2003 level and the percent of outstanding credit card debt that was seriously delinquent fell from 1.6 times its first quarter 2003 level to 1.2 times its first quarter 2003 level.

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4 replies

  1. So, people needed credit to survive the economic downturn, and now they are starting to pay down the debt…another positive sign?

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