Bankruptcies, Foreclosures, Defaults and Consumer Collections: Free Money Always Gets the Job Done

Bankruptcies, Foreclosures, Defaults and Consumer Collections: Free Money Always Gets the Job Done

Powell said many times consumers may accept a crunch because loan distress is at historic lows. What consumers can’t stand for long is runaway inflation.

By Wolf Richter for WOLF STREET.

We’ll start with consumer bankruptcies because that’s where credit problems often end, if they can’t be resolved. Next, we’ll look at foreclosures, third-party collections, and chargebacks. What emerges is the image of a consumer, still full of pandemic money and rising incomes.

Consumer bankruptcies had plunged when the free money arrived, including PPP loans, as well as the various forbearance programs and eviction bans. And the number of consumer bankrupts has continued to fall to historic lows and has hobbled along those historic lows for the past year and a half.

In the third quarter, the number of consumers who filed for bankruptcy rose slightly from the second quarter, to 99,000, but was still lower than a year ago, according to data from the Household Debt and Credit Report of the Bank. New York Fed, and half already low levels of Good Times (around 200,000):

Seizures plunged in the third quarter and reached ultra-historic lows since the mortgage forbearance programs, where delinquent mortgages were frozen and no longer counted as delinquent. Most borrowers have now exited the forbearance programs, either by having the mortgage modified in some way or by selling the home and paying off the mortgage, which was easily possible in the middle of the pandemic spike in house prices. The pandemic free money also helped.

Foreclosures, after rising for two quarters, fell again in the third quarter to just 28,500 mortgages with foreclosures, reversing the beginnings of a trend that had formed. During the good times before the pandemic, there were about 70,000 mortgages with foreclosures, more than double the current number:

The share of Consumers with third-party collections fell to a new all-time low in the third quarter of just 5.7%, after rising slightly in the second quarter. Third-party collections are recorded on a consumer’s credit report when a lender has sold a badly delinquent account for cents on the dollar to a collection agency who will then pursue the defaulter for an amount greater than what he had paid:

Mortgage Delinquencies and HELOC remained near all-time lows. The 30+ day default rate for mortgages reached 2.1% (red line in the chart below), which was still much lower than it was before the pandemic. During the good times before Housing Bust 1, in 2005, the delinquency rate was 4.7%. During the good times before the pandemic, the delinquency rate was around 3.5%.

The 30+ day failure rate of HELOCs fell to 2.0%. This is in line with the good times:

Mortgage balances have exploded due to the explosion in house prices in recent years, even as home sales plunged in 2022. In the third quarter, they reached $11.67 trillion:

But HELOC balances have been declining since HELOCs exploded during Housing Bust 1, and over the past year and a half they’ve hit very low levels and haven’t come down from those levels yet.

I expect HELOC balances to gradually increase in the future as taking money out of home equity via withdrawal refi is very expensive now as the entire mortgage would be matched current mortgage rates, not just the additional withdrawal portion.

Credit cards and personal loans: I have discussed credit card balances and chargebacks in detail here. The 30+ day delinquency rate on credit cards in the third quarter hit a pre-pandemic low of 5.2% of total balances (red line). The delinquency rate for “other” consumer loans, such as personal loans, has risen to 5.8% and remains well below pre-pandemic lows (green line):

Car loans: I have discussed auto loans and prime and subprime mortgages in detail here. The 30+ day delinquency rate rose to 6.2%, still below pre-pandemic record levels.

Student loan defaults are no longer arrears, and student loans are practically no longer loans, as far as federal student loans are concerned, because no one is making payments on them, and everything is still pending, and the balances are not generating any interest, which has just been extended until mid-2023, and a partial loan forgiveness has been promised, but is proving difficult to keep as a court battle has ensued.

The only delinquent student loans are those held by private lenders, and the overall delinquency rate – kind of a nonsensical notion with student “loans” these days – has plunged:

To the portion of household loan balances deemed “current” (not in arrears) reached an all-time high in Q2 2021 of 97.3% of total household loan balances, and has remained at that all-time high ever since, including in Q3 2022.

This is the total loan balance of all loan types – mortgages, car loans, student loans, credit card balances and other consumer loans – that are “current”, as a percentage of the total loan balance In progress :

The Fed has already said that the consumer can accept further tightening because consumer balance sheets are in very good shape – Powell mentions this at every press conference – and lending difficulties are minimal and below historic lows. What consumers can’t stand for long is runaway inflation.

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