USD 1.12 Trillion of Consumer Debt Delinquent as of 4Q 2011

The Federal Reserve Bank of New York released its fourth quarter report on household debt and credit. According to the report, the total consumer indebtedness was USD11.53 trillion (a reduction of USD126 billion) from the third quarter of 2011.

The reduction if total debt during the quarter was primarily due to decline in household mortgage and home equity lines of credit balances. This decline in consumer debt was partially offset by increase in consumer's non-real estate indebtedness and student loan indebtedness. 

In my opinion, the most noteworthy data was that 9.8% of the outstanding debt (USD1.12 trillion) was in some stage of delinquency. Further, according to the report, USD824 billion of debt is seriously delinquent (at least 90 days or "severely derogatory"). 

Total Balance by Delinquency Status
Total Debt by Delinquency Status
Source: FRBNY Consumer Credit Panel/Equifax

It is worth mentioning here that 72% of the debt outstanding as of fourth quarter of 2011 are mortgage loans. Further, of the roughly USD210 billion Dollar of new delinquent balance in 4Q 2011, nearly USD170 billion comes from mortgage loans.

 New Delinquent Balance by Loan Type
New Delinquent Balance by Loan Type
Source: FRBNY Consumer Credit Panel/Equifax

However, my primary concern is related to the impact of these numbers on the banking system. With USD824 billion of seriously delinquent debt, banks are expected to continue adding significant numbers to their non-performing assets. 

To add to the concerns, relatively weak economic activity and  over leveraged consumers would dissuade banks from being aggressive in their new loans disbursal. Banks would instead prefer to trade with the cheap money and cover for losses arising from the non-performing assets. This phenomenon would be negative for the economic system, which is dependent on consumption (and part of consumption is financed by debt).

The report also states that 2,89,000 individuals had a foreclosure notation added to their credit reports in the fourth quarter of 2011 resulting in an increase of 9.5% from third quarter 2011 levels. Therefore, there is no steady trend of improvement in number of foreclosures. This adds to the uncertainty and concerns for the banking system.

All this uncertainty and weakness in economic recovery is reflected in the final chart, which shows the new seriously delinquent balances by loan type. For me, this chart shows a consistently high entry into serious delinquent account in an improving economic environment. Therefore, if some renewed sluggishness is witnessed in the economy, the seriously delinquent numbers could be much more worse.

New Seriously Delinquent Balances by Loan Type
New Seriously Delinquent Balances by Loan Type
Source: FRBNY Consumer Credit Panel/Equifaax

In conclusion, the U.S. banking sector still has very tough times ahead and, difficult times for the banking sector would mean difficult times for consumers and the economy (in some ways). Only time and shift in policies will tell how far or close we are from a robust recovery. 

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