Consumer Credit Expands On Auto, Student Loans

September 11, 2013

Data released by the Federal Reserve Board indicates that consumer credit continued to expand in July, albeit at a slower pace than in the recent past. According to the Federal Reserve’s G.19 survey, consumer credit outstanding grew at a seasonally adjusted annual rate of 4.4% and now stands at $2.9 trillion. However, the growth in consumer credit outstanding recorded in July was 0.7 percentage points less than the 5.1% growth rate recorded in June and 2.4 percentage points less than the 6.8% growth rate recorded in May.

The expansion in consumer credit reflects a rise in non-revolving credit, but the growth rate in non-revolving credit slowed over the month. An earlier post illustrated that non-revolving credit is largely composed of auto and student loans. In July, non-revolving credit outstanding grew by 7.4%. However, the July growth rate of non-revolving credit was 2.0 percentage points slower than the growth rate recorded in June.

The rise in non-revolving credit was partially offset by a decline in revolving credit. This is the second consecutive month that revolving credit, which is largely made up of credit cards, fell. However, the rate of decline in July was smaller than the rate recorded in June. According to the release, revolving credit declined by a seasonally adjusted annual rate of 2.6%. In June, revolving credit fell by 5.2%.

Household debt data from the Federal Reserve Bank of New York indicates that historically, the amounts of credit card and auto loan debt outstanding were roughly similar. According to Chart 1, in the first quarter of 2003, the FRBNY estimated $641 billion in auto loans outstanding and $688 billion in credit card debt outstanding. By the first quarter of 2011, following the boom and bust experienced in the U.S. economy, auto loans outstanding totaled $706 billion while credit card loans equaled $696 billion. However, since the first quarter of 2011, the amount of auto loans outstanding has begun to increase while the level of credit card debt outstanding continues to decline. In the second quarter of 2013, the latest data available, auto loans outstanding had risen to $814 billion while credit card debt outstanding had fallen to $668 billion.

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A previous post illustrated that the decline in credit card debt outstanding reflects a decrease in both the number of open credit card accounts and in the average amount outstanding. Conversely, both the number of auto loans and the average loan amount are climbing, but the average loan amount has risen more. The growth in the number of accounts and in loan size reflects consumers’ ability and willingness to finance car purchases. %. In contrast, the observed increase in mortgage demand is not being met with easier lending standards, holding back a more robust housing recovery. As chart 2 below illustrates, after dipping to 79.8 million accounts in the second quarter of 2011, the number of auto loan accounts has risen by 5.4% to 84.0 million accounts. Meanwhile, the average auto loan, calculated by dividing the total amount of auto loans outstanding by the total number of accounts, has risen by 11.9% since it reached its trough in the first quarter of 2010. Since the second quarter of 2011, when the number of auto loan accounts began to rise, the average auto loan has increased by 9.3%.

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Housing Remains a Key Component of Household Wealth

September 4, 2013

Recently released research by NAHB reaffirms that homeownership is an important component of household wealth accumulation.

Part of the reason why the primary residence is an important source of household wealth is because of its size on the household balance sheet.

As Figure 1 illustrates, the primary residence represents the largest asset category on the balance sheets of households. At $20.7 trillion, the primary residence accounted for almost one-third, 30%, of all assets held nationally by households in 2010. According to the report, the primary residence represented 62% of the median homeowner’s total assets and 42% of the median home owner’s wealth. In addition, the median value of the primary residence across all households was $100,000. In contrast, the median values of financial assets and vehicles were only $17,000 and $12,200 respectively.

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Another reason why the home is a large part of household balance sheets is because it is a widely held asset. The report shows that two out of every three households, 67%, owned a primary residence in 2010 while just over half of households, 50%, held a retirement account. Meanwhile, 16% of households owned either stocks or bonds.

The recent bust in the housing market had a severe impact on household balance sheets. Plummeting house prices contributed to the decline in the value of household assets. At the same time, prices of other assets such as equities also dropped, thus leaving the average contribution of the primary residence to a household’s total assets relatively unchanged, as shown in the report. However, since the debt underlying the primary residence did not decline as quickly as house values, the average household experienced a decline in both total wealth and in housing’s contribution to a household’s net worth. Nevertheless, as house prices recover, so too should household wealth.

Equity in residential property tends to be a particularly important component of wealth for lower income, older households. According to the report, the median net worth for households over the age of 75 with household income below $35,000 was $110,900 in 2010. This is 25 times the net worth for households under age 45 in the same income bracket have. Also for 75+ households with incomes under $35,000, the median share of net worth held as equity in a primary residence is 60 percent. Younger households in the same income bracket tend to have no equity at all in a home (the median residential equity share of total net worth for households with incomes under $35,000 in which the head was younger than 54 was $0). Higher income households over age 75 have higher net worth and more equity in a home in absolute terms, but equity in a primary residence accounts for a smaller share of total net worth.


SLOOS: CRE Lending Standards Ease, But Mostly At National Banks

August 14, 2013

The Federal Reserve Board recently released its quarterly survey of senior bank loan officers. The standard questions asked by the survey address changes in the standards and terms on, and demand for, bank loans to businesses and households over the past three months. The most recent survey results indicate that a moderate fraction of banks had eased their standards for approving applications for commercial real estate (CRE) loans over the second quarter. About half of the banks, on net, reported that they had experienced stronger demand for such loans.

The July 2013 iteration of the Senior Loan Officer Opinion Survey also included a special set of questions on changes in lending standards and demand over the past twelve months for construction and land development loans as well as loans secured by multifamily residential properties, two major categories of CRE loans. According to the survey results, lending standards reportedly eased while demand strengthened. However, for these two types of CRE loans, the net share of banks reporting a strengthening in demand exceeded the reported fraction of banks easing their lending standards. A net fraction of 13% of banks reported their lending standards on construction and land development loans eased over the past year while a net percentage of 33% reported easing lending standards on loans secured by multifamily residential properties. Meanwhile, 42% of banks on net reported stronger demand for construction and land development loans and 53% of banks reported stronger demand for loans secured by multifamily residential properties, on net.

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Although banks reported easier lending standards overall, the net proportion of banks easing their standards lagged the net share of banks reporting stronger demand. The smaller share of banks reporting easier lending standards over the past year largely reflects a small net percentage of “other banks” easing their lending standards. “Large banks” reported having eased lending standards in greater proportion relative to their “other bank” peers. According to the survey, large banks refer to large, national banks while other banks encompass large but regional banks.  As chart 2 illustrates, a net of 24% of large banks reported having eased credit standards on construction and land development loans over the past year while 54% of large banks eased standards on loans secured by multifamily residential properties, on net. In contrast, a net of 0% of large regional banks reported having eased their lending standards on construction and land development loans while 11% of these banks reported easier lending standards on loans secured by multifamily residential properties.

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However, strong demand for these loans was reported by banks across geographic concentration.  Chart 3 portrays these results. According to this chart, a net fraction of 38% of large national banks reported stronger demand for construction and land development loans over the past year while a net of 54% reported stronger demand for loans secured by multifamily residential properties. Similarly, a net of 46% of large regional banks reported stronger demand for construction and land development loans while 51% of these banks reported stronger demand for loans secured by multifamily residential properties, on net.

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Overall, a net fraction of banks have reported easier lending standards and stronger demand for both construction and land development loans as well as loans secured by multifamily residential properties. However, eased lending standards are largely occurring at large national banks. Fewer large regional banks on net reported that their lending standards eased over the past year. Meanwhile, all banks, regardless of the size of their geographic concentration reported stronger demand for these loan products. These results confirm similar findings by NAHB’s AD&C Financing Survey. Many homebuilders are more likely to seek financing from regional banks than national ones. As a result, results from the Senior Loan Officer Opinion Survey indicate that CRE lending conditions continue to be a headwind to new home construction.


Multifamily Rental Properties: Would You Believe 2.25 Million?

March 29, 2013

According to a new survey sponsored by HUD and conducted by Census Bureau, there are 2.25 million multifamily rental properties in the U.S.  You may wonder if we really needed a new survey to tell us this.  The short answer is yes.

RHFS 01

In the decennial Census and virtually all surveys of housing, the government goes to housing units and starts by asking questions of the occupants.  You can count most single-family properties this way, but not multifamily properties that, by definition, have more than one unit per property.

To fill the information gap, NAHB has been a strong advocate of something like the new Rental Housing Finance Survey (RHFS).   One advantage of the RHFS is that it goes to property owners and mangagers, and therefore can collect information about items like upkeep and financing that tenants of rental apartments typically don’t know.  But one of the reasons NAHB has long been advocating a property-level survey like this is simply to get very basic information on counts of buildings and properties.

According to the RHFS, the lion’s share of the 2.25 million multifamily rental properties in the U.S.—1.64 million—consist of a single apartment building.  There are, of course, properties with more than one building—nearly 100,000 properties have 20 or more.  On average, multifamily rental properties turn out to have 2.5 buildings, so the total number of multifamily rental buildings in the U.S. works out to 5.6 million.

RHFS 02

A lot of the 2.25 million properties would be classified as small by most standards.  Over 1.4 million of them are valued by their owners at less than $500,000.  About 850,000 are even valued at less than $200,000.  Although a little over 6 percent of owners failed to report the current market value of their properties to the RHFS, that still leaves more than 2.1 million multifamily properties, and they have a total market value that adds up to roughly $3.8 trillion.

For readers who like more infomation, the Census Bureau has a number of additional statistics in tables posted on its RHFS website.  NAHB is also in the process of analyzing the new multifmaily rental data and will feature it in upcoming blogs.


Consumer Credit Expands, but HELOCs Continue Their Decline

March 7, 2013

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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Fed Beige Book: Economic Activity Continues to Expand

March 7, 2013

Anecdotal evidence collected by the Federal Reserve Board’s Summary of Current Conditions, commonly known as the Beige Book, continues to indicate “moderate” economic growth. In its most recent iteration, 10 of the 12 Federal Reserve Districts reported that economic activity in their Districts had expanded at a “moderate” or “modest” pace since the previous Beige Book. The Boston and Chicago Districts described growth in activity as “slow”.

Over the period since the last Beige Book, residential real estate markets strengthened in nearly all Districts. In particular, the Philadelphia District indicated that potential buyers expressed greater confidence, including potential entry-level purchasers that had been increasingly opting to rent up to mid-summer. The Richmond and Atlanta Districts observed multiple offers on many homes.

Meanwhile, residential construction was reported as being higher in 11 of the 12 Federal Reserve Districts. Kansas City indicated that residential construction was “unchanged”. Multi-family construction, in particular, exhibited ongoing strength; however some Districts noted that these builders were still facing difficulty securing financing.

In the banking sector, borrowing standards have loosened somewhat and asset quality continued to improve in most Districts. Earlier analysis of the Fed’s Senior Loan Officer Opinion Survey illustrated the growing optimism of bankers over mortgage quality in 2013. However, some District banks noted that their measures of profit from mortgage lending were declining.


Refinancings Contribute to A Lower Average Mortgage Debt Burden

February 21, 2013

Mortgage applications eased for the second consecutive week. According to the Mortgage Bankers Association, mortgage application activity, which includes both refinancing and home purchase demand, was 1.7% lower on a seasonally adjusted basis in the week ending Feb. 15. In the week ending February 8, the market index fell by 6.4%. The most recent decline in weekly seasonally adjusted mortgage applications reflected both a 1.7% drop in refinancing applications and a 1.7% decrease in mortgage applications for purchase.

Applications for a refinancing account for the majority of growth in mortgage applications. The impact of refinancing applications partly reflects its share of total mortgage applications. Refinancing applications currently account for 72.5% of all applications. In addition, applications for mortgage refinancing have grown faster than applications for mortgage purchase. As Chart 1 illustrates, mortgage applications for refinancing have risen steadily since early 2011. Meanwhile, mortgage applications for purchase have remained relatively flat through 2011 and most of 2012, rising noticeably only in the last few months. Between March 2011 and October 2012, total mortgage applications grew by 78.2%. During this same period, mortgage applications for refinancing more than doubled, rising by 115.4% while mortgage applications for purchase grew by only 1.1%. Since October 2012, total mortgage applications have declined somewhat as the drop in applications for refinancing more than offset the increase in the mortgage applications for purchase. Over the past four months, total mortgage applications have decreased by 9.6% as mortgage applications for purchase rose by 6.7%, but mortgage applications for refinancing declined by 12.6%.

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The Federal Home Loan Mortgage Corporation compiles statistics on loans it purchases that refinance loans already held in its portfolio. These statistics are based on a sample of properties for which it has funded two or more successive loans. In 2012, 53.8% of these refinancings resulted in a new loan amount that was unchanged from the previous loan, an increase of 7.2 percentage points from 2011 and 8.6 percentage points from its 2003 peak. Meanwhile, the share of refinancings that led to either a higher loan amount or a lower loan amount both declined between 2011 and 2012, by 2.5 and 4.7 percentage points respectively. Conversely, between 2003 and 2006, the vast majority of these refinancings resulted in a higher loan balance for the homeowner. In 2003, 38.5% of refinancings resulted in a new loan balance that was at least 5.0% greater than the pre-refinanced loan balance, while 16.3% of refinancings led to a lower loan balance and 45.2% of refinancings had no effect on the loan balance. By 2006, the share of refinancings resulting in at least a 5.0% higher loan balance grew to 86.3% while the share of refinancing that resulted in a lower loan balance stood at 5.3% and the share refinancing that left the loan balance unchanged was 8.4%. However, between 2006 and 2011, growth in both the share of refinancings resulting in a lower loan balance and in the proportion of refinancings that leave the loan amount virtually unchanged have offset the decline in the percentage of refinancings that led to a higher loan amount.

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In addition to its data on loan amounts, the Federal Home Loan Mortgage Corporation also maintains statistics on the ratio of the new to old mortgage rate and reports the median ratio. In this ratio, the numerator is the mortgage interest rate on the newly refinanced loan amount and the denominator is the rate on the old mortgage. The data exclude adjustable rate mortgages. A ratio equal to 100.0 indicates that the average refinancing did not change the mortgage interest rate while a ratio below 100.0 means that a refinancing resulted in a lower mortgage rate on average. A ratio greater than 100.0 indicates that refinancing led to a higher average interest rate.

As mortgage rates rose between January 2003 and December 2005, the difference between the mortgage interest rate on the old mortgage and the interest rate secured after refinancing began to shrink. By January 2006, refinancing resulted in a higher interest rate, on average. As Chart 3 illustrates, between January 2003 and December 2005, the 30-year fixed rate mortgage rose by 0.4 percentage points to 6.3%. Meanwhile, the ratio of the new rate to the old rate rose by 18.5 points to 99.7. In January 2006, the ratio reached 100.7. The ratio of the new rate to the old rate remained above 100.0 until November 2007 and it eclipsed 100.0 again during the third quarter of 2008.

More recently, refinancing has allowed some existing homeowners to lock-in a lower interest rate and lower their monthly mortgage payment. As Chart 3 shows, the recent decline in the 30-year fixed mortgage rate coincides with a decrease in the median ratio of the new mortgage interest rate and the old mortgage rate. Between April 2011 and December 2012, the 30-year fixed mortgage rate fell by 1.5 percentage points to 3.4%. At the same time the ratio of the new rate to the old rate declined by 15.4 points to 66.5. In other words, the new mortgage rate obtained from a refinancing was, on average, 66.5%, of the old mortgage rate. According to research by NAHB, a new interest rate that was both 3.4% and was also 66.5% of the old mortgage interest rate, 5.0%, would result in an estimated mortgage payment savings of roughly $182 per month or $2,184 per year on a $225,000 mortgage loan. Over the span of 30 years, an existing homeowner would save an estimated $65,520 under these conditions.

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Securitizations of Household Debt Accounted For Bond Market Growth

February 20, 2013

U.S. bonds outstanding have grown from $2.5 trillion in 1980 to $36.9 trillion in 2011. Over this period mortgage-related and asset-backed securities accounted for much of this increase. According to Chart 1, the amount of mortgage-related and asset-backed securities outstanding grew from $0.1 trillion in 1980 to $10.2 trillion by 2011. The growth in mortgage-related and asset-backed securities exceeded the increase in other U.S. bonds. As a result, their share of the total U.S. bond market expanded during this period. Chart 2 shows that mortgage-related and asset-backed securities represented 4.4% of U.S. bonds outstanding in 1980. By 2007, they accounted for 34.5% of outstanding U.S. bonds.  Since 2007, the share of the U.S. bond market that is attributable to mortgage-related and asset-backed securities has declined 6.9 percentage points to 27.6%. While the amount of mortgage-related and asset-backed securities outstanding continued to grow between 2007 and 2011, the amount of U.S. Treasury securities and corporate debt outstanding has risen even faster. However, despite a drop in its share between 2007 and 2011, the value of outstanding asset-backed and mortgage-related securities exceeds that of every other category.

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Between 1980 and 2007, mortgage-related and asset-backed securities accounted for the majority of growth in the U.S. bond market. Mortgage-related securities include both mortgage-backed securities (MBS) and collateralized mortgage obligations (CMOs). Like MBS, CMOs pay investors from cash flow generated by its underlying collateral. Unlike MBS, one CMO can offer a menu of payment options for investors with different risk-return appetites. Chart 3 shows that the value of mortgage-related securities outstanding as a share of the total U.S. bond market grew from 4.4% in 1980 to 21.9% in 1993. By 2007, its share of outstanding U.S. bonds had increased to 25.3%. Since 2007, the share of outstanding U.S. bonds represented by mortgage-related securities has fallen 2.7 percentage points to 22.6%. Meanwhile, the share of asset-backed securities outstanding, which was 0.2% of total U.S. bonds outstanding in 1986, grew to 9.2% by 2007. However, since 2007, its share has decreased 4.2 percentage points to 4.9%.

Household debt products underlie the majority of outstanding mortgage-related and asset-backed securities. Residential mortgage-related securities include both agency MBS and CMOs as well as both private label Residential MBS (RMBS) and CMOs. It excludes private label Commercial MBS (CMBS). Consumer financial asset-backed securities are linked to credit cards, auto loans, home equity loans, and student loans. According to Chart 3, 17.4 of the 17.5 percentage point expansion in mortgage-related securities between 1980 and 1993 were attributable to residential mortgage-related securities. Although its share of mortgage-related securities fell slightly, it still accounted for 91.6% of mortgage-related securities outstanding in 2011. At the same time, the outstanding amount of asset-backed securities that were based on consumer financial products accounted for 5.5 percentage points of the 9.2 percentage point growth between 1987 and 2007. By 2011, asset-backed securities based on consumer financial products represented 56.8% of all asset-backed securities outstanding. Meanwhile, collateralized debt obligations (CDOs) accounted for 37.4% in 2011.

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As Chart 4 illustrates, home equity linked debt and CDOs were the primary drivers behind the growth in asset-backed securitizations between 1985 and 2011. The Securities Industry and Financial Markets Association notes that the inclusion of home equity in asset-backed security totals instead of mortgage-related totals is based on the market’s classification. Similar to other asset-backed securities, CDOs pay investors from cash flow generated by its underlying collateral. Unlike other asset-backed securities, the underlying collateral of a CDO can be composed of various assets and even other derivatives. However, according to Figure 2 of research from the Federal Reserve Bank of Philadelphia, home equity accounted for nearly 70.0% of the CDO balance in 2007 and other, non-commercial mortgage backed securities accounted for roughly another 10.0%.

In 1985, asset-backed securities were solely linked to automobile loans and equipment loans. However, by 1999, home equity-backed securities accounted for the largest portion of outstanding asset-backed securities at 34.8%. CDOs meanwhile, accounted for 14.3%. By 2006, home equity-backed securities outstanding peaked at 39.8% and the combination of home equity-backed securities and CDOs represented 69.3% of the market. The combined share of home equity-backed securities and CDOs climbed to 69.9% in 2007 as the decline in home equity-backed securities was offset by continued growth in CDOs. Meanwhile, structured securities backed by automobile loans fell from 93.6% in 1986 to 6.1% in 2007 while those linked to credit card loans, which rose to 55.6% of outstanding asset-backed securities in 1990, represented 10.9% of this market by 2007. Since 2006, the share of outstanding asset-backed securities linked to home equity has declined by 12.3 percentage points to 27.5%. Over this six-year period, the outstanding amount of other asset-backed securities, especially CDOs also fell, but the outstanding amount linked to home equity declined more quickly. However, at its 2012 level, securitizations of home equity-backed securities and CDOs, the two largest categories of outstanding asset-backed securities, account for 63.3% of outstanding asset-backed securities while at 13.7%, student loans are a distant third.

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Revolving Credit Growth Moderate, but Underlying Dynamics Showing Signs of Recovery

January 11, 2013

According to the Federal Reserve Board, consumer credit outstanding, which is composed of credit not secured by real estate, expanded at a seasonally adjusted annual rate of 7.0% to $2.8 trillion in November. This is the fourth consecutive monthly increase in consumer credit outstanding and the second consecutive month that the monthly increase has risen. Following a 0.8% decline in July, consumer credit outstanding rose by 8.4% in August, 5.3% in September, 6.2% in October, and 7.0% in November. Earlier work demonstrated that the expansion in non-revolving credit card outstanding accounts for the growth in consumer credit while growth in revolving credit remains moderate.

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The expansion in consumer credit reflected an increase in student loan and auto debt outstanding, components of non-revolving credit. While education and auto debt outstanding has risen, credit card debt outstanding continues to fall. The recent decline in credit card debt outstanding, which accounts for the relatively tame growth in revolving credit, partly reflects fewer credit card accounts. As Chart 1 above illustrates, the dramatic decline in the number of credit card accounts between the second quarter of 2008 and the third quarter of 2010 is the result of both an increase in the number of closed accounts and a decrease in the number of opened accounts. Since the third quarter of 2010, the number of opened credit card accounts has begun to increase, however, its growth has not offset the number of closed credit card accounts.

Between the fourth quarter of 2004 and the second quarter of 2008, the number of opened accounts generally exceeded the number of closed accounts. During this period, 266.0 million more credit card accounts were opened than were closed. However, between the second quarter of 2008 and the third quarter of 2009, the number of closed accounts soared while the number of opened credit card accounts fell. Over this 5-quarter period the number of closed accounts grew by 153.8 million to 375.5 million. Meanwhile the number of opened accounts fell by 60.3 million to 168.4 million. Previous analysis demonstrated that the charge-off rate, the amount of unpaid credit card balances absorbed as a loss by banks as a share of total credit card debt outstanding, rose from 5.5% to 10.1% over this same period. The increase in the number of closed accounts during this period was likely the result of credit card holders defaulting on their credit card loans.

After peaking in the third quarter of 2009, the number of closed accounts declined dramatically as the charge-off rate fell below pre-recession levels. Meanwhile, the number of opened credit card accounts has begun to grow. However, until the fourth quarter of 2011, the declines in closed credit card accounts were not fully offset by the increases in the number of opened accounts. Between the third quarter of 2009 and the fourth quarter of 2011, the number of closed credit card accounts fell by 210.0 million to 165.6 million while the number of accounts opened rose by only 5.3 million. In the fourth quarter of 2011, 173.0 million accounts were opened. Since the fourth quarter of 2011, the total number of credit cards accounts has continued to fall. Over this period, the number of closed credit card accounts has risen by 19.5 million, but remains below its third quarter of 2009 high, while 3.7 million additional accounts have been opened.

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Although the soaring number of closed credit card accounts likely reflected an increase in the credit card charge-off rate, the number of credit card accounts opened may have decreased because banks were less willing to lend or as a result of consumers’ growing aversion to revolving credit. Data from the Federal Reserve Board’s Senior Loan Officer Opinion Survey, shown in Chart 2 above, illustrates that the decrease in the number of credit card accounts opened between the second quarter of 2007 and the third quarter of 2010 reflects both tighter lending standards imposed by banks and lower demand for revolving credit by consumers. The combination of lower demand for credit cards and tighter lending standards suggests that the reduction in credit was not solely a lender driven credit crunch or a one-sided pull-back on the part of consumers. However, the recently reported easing of credit standards combined with stronger demand for credit cards indicates that the number of opened credit card accounts should continue to recover as lenders and consumers find their way back to a more sustainable balance.

A growing share of banks reported weakening demand for consumer credit in the third quarter of 2005. In this quarter, a net of 9.8% of banks surveyed experienced strengthening demand for credit card products. By the fourth quarter of 2008, a net of 48.1% of bank respondents experienced weaker demand for credit cards. During this same period credit card lending standards tightened considerably, though at a slightly different pace. Over the two year period between the third quarter of 2005 and the third quarter of 2007 senior loan officers at surveyed banks maintained easier lending standards. However, in the fourth quarter of 2007, credit card lending standards began to tighten. By the third quarter of 2008 a net of 66.6% of banks tightened their lending standards on credit cards. The majority of banks continued to tighten their lending standards through the end of the recession.

Net demand for credit cards began their ascent in the third quarter of 2010. By the first quarter of 2011, a net of 5.6% of banks reported experiencing stronger demand for credit cards. After a slight decline in the second quarter of 2011, the measure returned to positive territory in third quarter of 2011. Since the third quarter of 2011 a net percentage of banks continued to experience stronger demand for credit cards. At the same time, credit card lending standards began their descent following the end of the recession. By the third quarter of 2010 a net of 7.9% of banks reported easing standards on credit cards. Since this period banks, on net, report continued easing of standards on credit cards.


National Data Suggest Household Deleveraging Of Credit Card Debt

December 13, 2012

The Federal Reserve Board recently reported that consumer credit outstanding rose in October on a monthly seasonally adjusted basis. An analysis of the release by NAHB illustrated that the expansion in consumer credit outstanding in 2011 and 2012 reflected growth in auto and student loans while credit card debt fell. This decline in credit card debt outstanding had begun prior to 2011. Since peaking in the fourth quarter of 2008, credit card debt outstanding has narrowed by 29.1% and is now below its 2003 level. The initial decline in credit card debt outstanding that occurred between the fourth quarter of 2008 and the first quarter of 2010 likely resulted from credit card defaults. However, since the first quarter of 2010, the decline in credit card debt outstanding more likely reflects credit card pay-offs.

Changes in the amount of credit card debt outstanding largely reflect conditions in credit card lending. As Chart 1 below illustrates, the total amount of credit card debt outstanding expanded between 2003 and 2008. As Chart 2 shows, the 25.9% increase in the total amount of credit card debt outstanding during this time period was largely the result of an escalation in the average credit card balance per account as opposed to growth in the number of credit card accounts. Between 2003 and 2008, the average credit card balance per account rose by 25.2% while the number of accounts grew by only 0.5%.

After peaking at $866.0 billion outstanding in the fourth quarter of 2008, the amount of credit card debt outstanding fell. The decline in credit card debt outstanding coincided with a surge in the charge-off rate and a steep decline in the number of accounts. At the same time, the average account balance grew. Between the fourth quarter of 2008 and the first quarter of 2010, when the charge-off rate rose by 7.0 percentage points, the amount of credit card debt outstanding fell by 12.0% and the number of credit card accounts decreased by 18.3%. Meanwhile, the average account balance per credit card account rose by 7.7%. In the period between the fourth quarter of 2008 and the first quarter of 2010, both the increase in the charge-off rate and a decline in the number of credit card accounts more likely indicate that the contraction in credit card debt outstanding resulted from credit card defaults rather than pay-offs.

Since the first quarter of 2010 the total amount outstanding has continued its descent even as credit card default risk has returned to a historically normal level. The extended decline in the amount of credit card debt outstanding primarily reflects both a narrowing in the average balance on credit card accounts and a decline in the number of credit card accounts. Between the first quarter of 2010 and the third quarter of 2012, the total amount of credit card debt outstanding has declined by 11.6% as the charge off rate has fallen 9.4 percentage points to 3.8%. At the same time, while the number of credit card accounts has declined by 1.0%, the average balance per account has contracted by 10.7%. The steep decline in the credit card charge-off rate combined with decreases in the number of credit card accounts and the average balance per account may indicate that the contraction in total credit card debt outstanding more likely reflects households paying off-their credit card balance than defaulting.

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