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Household Debt and Credit 2015 in Review Andrew Haughwout The views presented here are those of the authors and do not necessarily reflect those of the Federal Reserve Bank of New York, or the Federal Reserve System. 1 Total Debt Balance and its Composition Trillions of Dollars Trillions of Dollars 15 Mortgage HE Revolving Auto Loan Credit Card Student Loan Other 15 2015Q4 Total: $12.12 Trillion 2014Q4Total: $11.83 Trillion 12 (3%) 12 (10%) (6%) (9%) 9 9 (4%) 6 (68%) 6 3 3 0 0 Source: FRBNY Consumer Credit Panel/Equifax 2 03:Q1 03:Q3 04:Q1 04:Q3 05:Q1 05:Q3 06:Q1 06:Q3 07:Q1 07:Q3 08:Q1 08:Q3 09:Q1 09:Q3 10:Q1 10:Q3 11:Q1 11:Q3 12:Q1 12:Q3 13:Q1 13:Q3 14:Q1 14:Q3 15:Q1 15:Q3 Auto and Student Debt Growth has Outstripped Mortgage and CC 2.0 1.8 Housing Auto CC Student 1.6 1.4 1.2 1.0 0.8 0.6 0.4 3 Total Balance by Delinquency Status Percent Current 30 days late 60 days late 90 days late 120+ days late Severely Derogatory 100 Percent 100 95 95 90 90 85 85 80 80 75 03:Q1 04:Q1 05:Q1 06:Q1 07:Q1 08:Q1 09:Q1 10:Q1 11:Q1 12:Q1 13:Q1 14:Q1 15:Q1 75 Source: FRBNY Consumer Credit Panel/Equifax 4 Transition into delinquency for current mortgages Percent Percent 4.0 4.0 3.5 3.5 3.0 3.0 2.5 2.5 2.0 2.0 1.5 1.5 1.0 2000-2005 avg: 1.45% 1.0 2015: 1.1% 0.5 0.0 00:Q1 0.5 02:Q1 04:Q1 06:Q1 08:Q1 10:Q1 12:Q1 14:Q1 0.0 16:Q1 Source: FRBNY Consumer Credit Panel/Equifax 5 Number of Consumers with New Foreclosures and Bankruptcies Thousands Thousands 1,200 1,200 Foreclosures Bankruptcies 900 900 600 600 300 300 0 03:Q1 04:Q1 05:Q1 06:Q1 07:Q1 08:Q1 09:Q1 10:Q1 11:Q1 12:Q1 13:Q1 14:Q1 15:Q1 0 Source: FRBNY Consumer Credit Panel/Equifax 6 Notable in 2015 Delinquencies continued to decline At year end 5.4% of debt was delinquent, lowest since early 2007 New foreclosures are at the lowest level we’ve seen Data begin in 1999 Bankruptcies also trending down Student loan delinquency remains high Total household debt rose $289 billion, or 2.4% Auto debt led the way, growing $109 billion (over 11%) Outstanding auto debt crossed the $1 trillion mark in Q2 Other non-housing debt also grew strongly (4.7% - 6.5%) Housing debt growth has been sluggish since end of deleveraging, and continued in 2015 7 WHITHER MORTGAGES? 8 Why has mortgage debt been so sluggish? In spite of rising house prices, mortgage credit hasn’t expanded much House prices up more than 1/3 since early 2012 But mortgage debt hasn’t grown (up less than 1%) A stark contrast to last expansion Both prices and debt roughly doubled 2000-2006 Why is this time different? 9 House Prices and Mortgage Debt Index (Jan 2000 = 100) 200 $ Billions 10000 180 160 9000 CoreLogic HPI (Left Axis) 8000 140 7000 120 6000 Mortgage Debt Outstanding (Right Axis) 100 5000 80 4000 60 2000 3000 2002 2004 2006 2008 2010 Source: FRBNY Consumer Credit Panel/Equifax and CoreLogic 2012 2014 2016 Fact 1: Foreclosures’ influence is fading Foreclosures eventually result in debt being “charged off”: disappearing from borrower’s credit report, reducing balances Charge offs were minor (< $50 billion per year) until 2007 Then grew sharply to > $250 billion in 2009-13 Now declining ($130 billion in 2015) So foreclosures are still reducing balances, but influence fading Can’t explain sluggish growth since 2012 11 -200 -400 2000Q4 2001Q2 2001Q4 2002Q2 2002Q4 2003Q2 2003Q4 2004Q2 2004Q4 2005Q2 2005Q4 2006Q2 2006Q4 2007Q2 2007Q4 2008Q2 2008Q4 2009Q2 2009Q4 2010Q2 2010Q4 2011Q2 2011Q4 2012Q2 2012Q4 2013Q2 2013Q4 2014Q2 2014Q4 2015Q2 2015Q4 Fact 1: Foreclosures’ influence is fading $ Billion 1,000 800 600 400 200 0 First and second lien charge offs Source: FRBNY Consumer Credit Panel/Equifax 12 Fact 2: Purchases not adding much Housing transactions typically add to outstanding debt Some new construction purchased with (net) new mortgages Housing starts still well below boom levels Sellers’ (paid off) mortgages are smaller than buyers’ (opened) Sellers have paid down debt Especially true when prices are rising, buyer must borrow more In 2006 and 2007, transactions added $800B - $1T annually $200B in 2009-11, now back to $350B Much lower contribution to mortgage debt than during the boom 13 Fact 2: Purchases not adding much $ Billion 1,000 800 600 400 200 -200 -400 2000Q4 2001Q2 2001Q4 2002Q2 2002Q4 2003Q2 2003Q4 2004Q2 2004Q4 2005Q2 2005Q4 2006Q2 2006Q4 2007Q2 2007Q4 2008Q2 2008Q4 2009Q2 2009Q4 2010Q2 2010Q4 2011Q2 2011Q4 2012Q2 2012Q4 2013Q2 2013Q4 2014Q2 2014Q4 2015Q2 2015Q4 0 First lien originations plus normal (non-charge-off) payoffs First and second lien charge offs Source: FRBNY Consumer Credit Panel/Equifax 14 Fact 3: Much less cash out than in boom Borrowers can take cash out of properties without moving With a cash-out refinance With a junior lien (eg, Home Equity Loans or Lines of Credit) Very important during the boom $300-$400 billion in cash withdrawn per year in 2003-2007 Declined sharply during the bust $10-$40 billion annual rate since 2012 Much lower contribution to mortgage debt than during the boom 15 2000Q1 2000Q3 2001Q1 2001Q3 2002Q1 2002Q3 2003Q1 2003Q3 2004Q1 2004Q3 2005Q1 2005Q3 2006Q1 2006Q3 2007Q1 2007Q3 2008Q1 2008Q3 2009Q1 2009Q3 2010Q1 2010Q3 2011Q1 2011Q3 2012Q1 2012Q3 2013Q1 2013Q3 2014Q1 2014Q3 2015Q1 2015Q3 Fact 3: Much less cash out than during the boom $ Billion 300 200 100 0 -100 -200 refinance second lien activity -300 Source: FRBNY Consumer Credit Panel/Equifax 16 Fact 4: First-lien principal pay-down has grown a lot 2015Q4 outstanding mortgage debt is $8.25T We’ve seen this level 3 times now (all Q4) 2006: $170 billion in annual pay-down (2.1%) 2011: $234 billion in annual pay-down (2.8%) 2015: $288 billion in annual pay-down (3.5%) $118 billion or 70% increase since 2006 on same base 17 Fact 4: First-lien principal pay-down has grown a lot $ Billion 300 200 100 2000Q1 2000Q3 2001Q1 2001Q3 2002Q1 2002Q3 2003Q1 2003Q3 2004Q1 2004Q3 2005Q1 2005Q3 2006Q1 2006Q3 2007Q1 2007Q3 2008Q1 2008Q3 2009Q1 2009Q3 2010Q1 2010Q3 2011Q1 2011Q3 2012Q1 2012Q3 2013Q1 2013Q3 2014Q1 2014Q3 2015Q1 2015Q3 0 -100 -200 -300 refinance first lien paydown second lien activity Amortization has increased by $90 billion per year since 2009 18 Why is pay-down share increasing? Three factors determine pay-down share Interest Loans with low rates have higher principal pay-down per dollar of payment Loan age Older loans have higher principal pay-down per dollar of payment Term rate of loan Loans with shorter terms have higher principal pay-down per payment All of these factors are currently pushing principal share up 19 Interest rate, term and age determine principal share 100% 90% 80% 70% 60% 50% 30-yr @ 6.8% 40% 30-yr @ 3.5% 30% 15-yr @ 2.7% 20% 10% 1 13 25 37 49 61 73 85 97 109 121 133 145 157 169 181 193 205 217 229 241 253 265 277 289 301 313 325 337 349 0% Payment number Source: Authors’ calculations 20 Savings from refinancing a $200,000 mortgage 30-yr @ 6.8%, pmt 78 15-yr @ 2.7%, pmt 1 Assumes borrower income of $75,000 finances all payments Principal Interest Payment $1,303 Principal $ 263 (4.2% of income) Principal Interest Payment $1,352 (+3.7%) Principal $ 902 (14.4% of income) Source: Authors’ calculations 21 Stock of outstanding debt has aged since 2003 Months since origination 80 70 25th percentile 50th percentile 75th percentile average 60 50 40 30 20 10 Mean loan age rises from 23 to 50 months 2015Q3 2015Q1 2014Q3 2014Q1 2013Q3 2013Q1 2012Q3 2012Q1 2011Q3 2011Q1 2010Q3 2010Q1 2009Q3 2009Q1 2008Q3 2008Q1 2007Q3 2007Q1 2006Q3 2006Q1 2005Q3 2005Q1 2004Q3 2004Q1 2003Q3 2003Q1 2002Q3 2002Q1 2001Q3 2001Q1 2000Q3 2000Q1 1999Q3 1999Q1 0 Source: New York Fed Consumer Credit Panel / Equifax 22 9 1 2000 - Jan 2000 - Aug 2001 - Mar 2001 - Oct 2002 - May 2002 - Dec 2003 - Jul 2004 - Feb 2004 - Sep 2005 - Apr 2005 - Nov 2006 - Jun 2007 - Jan 2007 - Aug 2008 - Mar 2008 - Oct 2009 - May 2009 - Dec 2010 - Jul 2011 - Feb 2011 - Sep 2012 - Apr 2012 - Nov 2013 - Jun 2014 - Jan 2014 - Aug 2015 - Mar Mortgage rates much lower, especially for 15-year 30-year 15-year 7/06: 6.8% Diff (right axis) 1 8 0.8 7 6 0.6 5 0.4 4 0.2 3 2 0 12/12: 2.7% 0 -0.2 -0.4 23 Credit Score at Origination: Mortgages* Score Score 800 800 750 Median 700 750 700 25th percentile 650 650 10th percentile 600 600 550 550 Tight lending standards mean lower interest rates for average borrower 500 99:Q2 500 01:Q2 03:Q2 05:Q2 07:Q2 09:Q2 11:Q2 13:Q2 15:Q2 Source: FRBNY Consumer Credit Panel/Equifax * Credit Score is Equifax Riskscore 3.0; mortgages include first-liens only. 24 1999:Q1 1999:Q3 2000:Q1 2000:Q3 2001:Q1 2001:Q3 2002:Q1 2002:Q3 2003:Q1 2003:Q3 2004:Q1 2004:Q3 2005:Q1 2005:Q3 2006:Q1 2006:Q3 2007:Q1 2007:Q3 2008:Q1 2008:Q3 2009:Q1 2009:Q3 2010:Q1 2010:Q3 2011:Q1 2011:Q3 2012:Q1 2012:Q3 2013:Q1 2013:Q3 2014:Q1 2014:Q3 2015:Q1 2015:Q3 Effective rate on outstanding mortgages has fallen Percent 8 7 6 5 4 3 2 Down over 50% (380 bps) since 2000 1 0 Source: Bureau of Economic Analysis 25 Mortgage payments and their composition $Billions 2008-2015: Total payment falls 8%, principal paydown rises 41% 250.0 principal reduction interest payment (portion that does not reduce principal) quarterly payment 200.0 150.0 100.0 50.0 2015: $298B 2008: $209B 201512 201506 201412 201406 201312 201306 201212 201206 201112 201106 201012 201006 200912 200906 200812 200806 200712 200706 200612 200606 200512 200506 200412 200406 200312 200306 200212 200206 200112 200106 200012 200006 199912 199906 0.0 Source: New York Fed Consumer Credit Panel / Equifax 26 Summary Between 2000-2006, house prices and mortgage debt both doubled Since 2012 house prices have risen 34%, mortgage debt < 1% Foreclosures’ effect on reducing debt is fading Equity withdrawal and transactions adding only modestly to balances $400 billion vs $1.4 trillion annual Stable since 2012 A big change: increased principal paydown from aging stock of continuing debt and refinances into lower rate, shorter term debt $300 billion in paydown annually A major increase in savings for these households 27 Explanations, implications and outlook Some of this is easy to understand When borrower doesn’t move or refinance, debt gets older and principal payment goes up Lower rates and shorter terms refinances largely due to . . . . . . decline in overall rates . . . especially low 15-yr r Tighter standards mean average borrower gets a lower rate Some of it is less clear Are less equity withdrawal and transactions due to . . . . . . borrower caution or . . . tighter standards/supply? Could be a sign of stress for some borrowers (eg young student borrowers) 28 Explanations, implications and outlook Whatever the causes, these factors are increasing personal savings for these borrowers Existing stock of debt likely to “age in place” If rates go up, strong incentives to continue in low rate mortgage Leading to slow increase in pay-down/saving Could be offset by increase in equity withdrawal or purchase borrowing But little sign of that yet 29