Consumer Debt Declines; Auto Loans Rising to 8-Year High

Consumer debt fell last quarter for the first time in one year as mortgage originations fell to the lowest level since 2000, according to the Federal Reserve Bank of New York.

Household debt fell 0.2% or $18 billion to $11.63 trillion from January through March, breaking the longest streak of consecutive quarterly increases since late 2008. While total debt level was $479 billion higher than the previous year, it is 8.2% lower than a peak of $12.68 trillion in the third quarter of 2008.

Americans are increasingly taking on credit card debt, auto loans and student loans but shying away from the largest category of consumer credit: mortgages. The Obama administration has attempted to expand mortgage credit to more families through Freddie Mac and Fannie Mae.

Mortgage debt fell by $69 billion while home equity lines of credit (HELOCs) fell by $5 billion in the second quarter. Mortgage originations fell by $46 billion to reach $286 billion. Mortgage lending remains weak amid new government regulations, tight credit standards and an uncertain housing recovery.

A Federal Reserve survey of bank loan officers last week found that almost 25% have eased standards on mortgages to consumers with good credit. This is the first sign of a thaw in lending standards since the housing market collapsed. Nearly half of lenders said mortgage standards were tighter than they have been for the past decade, with half citing new federal regulations as reducing approval rates for larger mortgages.

Non-housing debt rose 2%, with the largest increase seen in auto loans. Car loans rose by $30 billion in the second quarter to $905 billion. This is the most in any three-month period since 2006. Outstanding balances on auto loans surged in the 13th consecutive quarterly increase.

Recent reports were confirmed that there is indeed a boom in car loans made to subprime borrowers with poor credit. This trend has alarmed consumer advocates and banking regulators. Since it bottomed out in 2009, auto loan balances have increased for all borrowers with credit from poor to excellent, but the strongest growth has been among borrowers at the low end of the scale.

The increase in auto loan debt comes as student loan debt rose $7 billion to $1.12 trillion and credit card debt increased $10 billion to $669 billion. Credit card dent remains slightly lower than the previous year, suggesting that consumers are still playing it somewhat safe when it comes to using credit.

More Americans are making payments on time. The percentage of consumers’ debt that was seriously overdue dropped to 4.5%, the lowest level since the beginning of 2008.