Consumer Debt: A Mixed Money Flow Message
Consumer Debt: A Mixed Money Flow Message
Delinquencies on certain types of home-equity and car loans spiked sharply in the fourth quarter of 2006 – although credit-card delinquencies remained unchanged – suggesting that problems are percolating in some areas of the consumer-debt market, an American Bankers Association report found.
In its quarterly survey of consumer loans, the ABA concluded that late payments on so-called “indirect” auto loans – those arranged through car dealerships – jumped to 2.57% in the fourth quarter, from 2.35% the quarter before. That’s the highest level since the second quarter of 2001, when the U.S. economy was mired in a recession.
Late payments on “direct” auto loans actually decreased slightly.
Also troublesome – given recent news about the pronounced slowdown in the formerly blistering housing market – was the marked spike in home-equity loan delinquencies.
Late payments on home-equity loans rose to 1.92% in the fourth quarter from 1.79% in the third quarter. That’s the worst showing since the first quarter of 2006.
A Troubling Money Flow Indicator
Payments are characterized as “delinquent” if they are 30 days or more past due. The ABA data is based on surveys it conducted of 300 banks nationwide, and the report is closely followed — especially during times of economic and financial uncertainty.
Because consumer spending accounts for 60% to 70% of all economic activity in the United States – and because U.S. consumers by a large margin favor debt over cash when making big-ticket purchases – surveys like this one are very closely watched by economists, market strategists and investors.
Here at Money Morning, it’s yet another example of how we scrutinize money flows of all types and analyze their potential impact on the investment markets. It also underscores that we don’t just use this strategy to seek out investment opportunities; we also employ it to protect ourselves against marketplace problems.
A separate survey released recently by the Mortgage Bankers Association concluded that a record number of homeowners faced the very real threat of foreclosure in the final quarter of last year – a revelation that roiled the U.S. financial markets.
Homeowners with rocky credit ratings who hold adjustable rate mortgages could face some of the most-severe problems because they won’t be able to refinance if rates spike, or before big “balloon” payments come due.
Because of those huge payments due, if these consumers cannot refinance, default would likely be their only option.
Declining housing prices and a spike in unsold homes could exacerbate the already-unpleasant situation. The reason: It will make already jittery lenders even more reluctant to make loans to marginal applicants – possibly even creating a credit crunch that could exacerbate the housing market’s downward spiral.
Depending upon the severity, these problems could spark sell-offs of stocks in industries affected by the housing downturn – banks, mortgage firms, homebuilders and suppliers, for example – and could even influence interest rates.
A Few Bright Spots
In the just-released ABA survey, at least not all the news was bad.
The ABA report found that percentage of delinquent credit-card payments was 4.56% in the fourth quarter, down slightly from a rate of 4.57% in the third quarter. Personal loan delinquencies held steady at 1.91%. And home equity lines of credit – which the ABA characterized as the lowest delinquency-rate category — held steady at 0.57%. Unlike home equity loans – essentially a second mortgage that bears a fixed interest rate over a set time period – the line of credit is a revolving credit line with an interest rate that varies in synch with shifts in the financial markets.
“It’s not a surprise to see some increase in home-equity loan delinquencies, given the weaknesses in the housing market,” said ABA Chief Economist James Chessen. “Looking at the whole profile of consumer finances, American consumers are, by and large, managing debt well. We are cautiously optimistic that the spillover [from the housing slowdown] will be small, given continued job growth and a still-strong economy.”
