Consumer Credit Expands, but HELOCs Continue Their Decline

March 7, 2013

Household debt outstanding rose for the first time in two years. According to data released by the Federal Reserve Bank of New York, household debt grew by $31.0 billion in the fourth quarter of 2012. The quarter-on-quarter not seasonally adjusted growth in household debt reflected an expansion in outstanding mortgages, auto loans, credit cards, and student loans. In the fourth quarter of 2012, these household debt products rose by a combined $41.0 billion. However, these gains were partially offset by a $10.0 billion decline in home equity lines of credit. Since increasing by $41.2 billion in the first quarter of 2011, total household debt outstanding experienced six consecutive quarters of declines, falling by $444.4 billion over that time span.

Outstanding balances on home equity lines of credit (HELOCs), which, along with home equity loans, were an important source of bond market growth, expanded significantly between 2003 and 2009. As Chart 1 illustrates, the outstanding amount of HELOCs totaled $242.0 billion in the first quarter of 2003, this amount was 37.8% of the outstanding amount of auto loans and 35.2% of the outstanding credit card debt. However, by the second quarter of 2009, the outstanding amount of HELOCs nearly tripled, growing by 194.6% to $713.0 billion. Over this same period, auto loans outstanding, $743.0 billion in the second quarter of 2009, rose by 15.9% while credit card balances, $824.0 billion, grew by 22.5%. Since the second quarter of 2009, the outstanding amount of HELOCs has contracted by 21.0% while credit card debt outstanding has fallen by 17.6%, although it rose in the latest quarter. The amount of outstanding auto loans, which returned to sustained growth in the second quarter of 2011, is now 5.4% above its second quarter 2009 level.

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The number of HELOC accounts also experienced a period of rapid growth. However, despite the rise in the number of HELOC accounts between first quarter of 2003 and the first quarter of 2008, the number of these accounts remained well below the number of auto loans and the number of credit card accounts. In the first quarter of 2008, there were 24.2 million home equity line of credit accounts, 80.8% greater than the number of accounts in the first quarter of 2003. Over this same period the number of auto loan accounts, 87.2 million in the first quarter of 2008, rose by 18.6% and the number of credit card accounts, 474.6 million in the first quarter of 2008, grew by 1.0%. However, at its peak in the first quarter of 2008, the number of HELOC accounts was only 27.8% of the number of auto loan accounts and 5.1% of credit card accounts.

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The growing amount of outstanding HELOCs was concentrated in a relatively smaller number of accounts. Despite the 80.8% increase in the number of HELOC accounts between the first quarter of 2003 and the first quarter of 2008, the outstanding amount of HELOCs rose by 174.0% over this same period. As a result, growth in the outstanding amount of HELOCs raised the size of the average account balance. As Chart 3 illustrates, growth in the balance on the average HELOC account, which generally tends to be larger than balances on other consumer financial products, eclipsed account balance growth of both credit cards and auto loans. Between the first quarter of 2003 and the first quarter of 2008, the average account balance on a HELOC account grew by 51.6% to $27,351. Meanwhile, the average auto loan and credit card balance, which grew by 6.3% and 20.4% over this same period, were $9,266 and $1,764 in the first quarter of 2008. In the fourth quarter of 2010, the average balance on a HELOC account peaked at $31,619, 3.6 times the average auto loan account balance and 4.6 times the average credit card account balance. However, since the fourth quarter of 2010, the average balance on a HELOC has declined somewhat, falling by 4.6% over the two year period.

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Data from the Federal Reserve Bank of New York that is displayed in the graph shown on page 9 of their report depicts the serious delinquency rate for HELOCs as being the lowest of household debt products. However, the current rate partly reflects that it started from a very low level. Instead, comparing the serious delinquency rate in each quarter relative to its level in the first quarter of 2003 conveys the magnitude of serious delinquencies in HELOCs. As chart 4 illustrates although most household debt products have begun the healing process, HELOCs still languish.

In the fourth quarter of 2007, the percent of outstanding HELOCs that were seriously delinquent was 3.8 times its level in the first quarter of 2003. By the second quarter of 2009, the percent of outstanding HELOCs that were seriously delinquent rose to 11.3 times its first quarter 2003 level. Between the first quarter of 2010 and the third quarter of 2012, the percent of outstanding HELOCs that was seriously delinquent rose from 11.6 times its first quarter 2003 level to 14.1 times its first quarter 2003 level. The percent of outstanding HELOCs that are seriously delinquent fell to 9.9 in the fourth quarter of 2012. However, according to the Federal Reserve Bank of New York, the decline in the delinquency rate that occurred in the fourth quarter of 2012 “can be attributed in large part to unusually high charge-offs of delinquent home equity lines of credit”. Meanwhile, in the first quarter of 2010, the percent of outstanding mortgage debt that was seriously delinquent peaked at 7.3 times its first quarter 2003 level, but has since fallen to 4.6 times its first quarter 2003 level. Over this same period, the percent of auto loans that were seriously delinquent declined from 2.2 times its first quarter 2003 level to 1.7 times its first quarter 2003 level and the percent of outstanding credit card debt that was seriously delinquent fell from 1.6 times its first quarter 2003 level to 1.2 times its first quarter 2003 level.

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Securitizations of Household Debt Accounted For Bond Market Growth

February 20, 2013

U.S. bonds outstanding have grown from $2.5 trillion in 1980 to $36.9 trillion in 2011. Over this period mortgage-related and asset-backed securities accounted for much of this increase. According to Chart 1, the amount of mortgage-related and asset-backed securities outstanding grew from $0.1 trillion in 1980 to $10.2 trillion by 2011. The growth in mortgage-related and asset-backed securities exceeded the increase in other U.S. bonds. As a result, their share of the total U.S. bond market expanded during this period. Chart 2 shows that mortgage-related and asset-backed securities represented 4.4% of U.S. bonds outstanding in 1980. By 2007, they accounted for 34.5% of outstanding U.S. bonds.  Since 2007, the share of the U.S. bond market that is attributable to mortgage-related and asset-backed securities has declined 6.9 percentage points to 27.6%. While the amount of mortgage-related and asset-backed securities outstanding continued to grow between 2007 and 2011, the amount of U.S. Treasury securities and corporate debt outstanding has risen even faster. However, despite a drop in its share between 2007 and 2011, the value of outstanding asset-backed and mortgage-related securities exceeds that of every other category.

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Between 1980 and 2007, mortgage-related and asset-backed securities accounted for the majority of growth in the U.S. bond market. Mortgage-related securities include both mortgage-backed securities (MBS) and collateralized mortgage obligations (CMOs). Like MBS, CMOs pay investors from cash flow generated by its underlying collateral. Unlike MBS, one CMO can offer a menu of payment options for investors with different risk-return appetites. Chart 3 shows that the value of mortgage-related securities outstanding as a share of the total U.S. bond market grew from 4.4% in 1980 to 21.9% in 1993. By 2007, its share of outstanding U.S. bonds had increased to 25.3%. Since 2007, the share of outstanding U.S. bonds represented by mortgage-related securities has fallen 2.7 percentage points to 22.6%. Meanwhile, the share of asset-backed securities outstanding, which was 0.2% of total U.S. bonds outstanding in 1986, grew to 9.2% by 2007. However, since 2007, its share has decreased 4.2 percentage points to 4.9%.

Household debt products underlie the majority of outstanding mortgage-related and asset-backed securities. Residential mortgage-related securities include both agency MBS and CMOs as well as both private label Residential MBS (RMBS) and CMOs. It excludes private label Commercial MBS (CMBS). Consumer financial asset-backed securities are linked to credit cards, auto loans, home equity loans, and student loans. According to Chart 3, 17.4 of the 17.5 percentage point expansion in mortgage-related securities between 1980 and 1993 were attributable to residential mortgage-related securities. Although its share of mortgage-related securities fell slightly, it still accounted for 91.6% of mortgage-related securities outstanding in 2011. At the same time, the outstanding amount of asset-backed securities that were based on consumer financial products accounted for 5.5 percentage points of the 9.2 percentage point growth between 1987 and 2007. By 2011, asset-backed securities based on consumer financial products represented 56.8% of all asset-backed securities outstanding. Meanwhile, collateralized debt obligations (CDOs) accounted for 37.4% in 2011.

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As Chart 4 illustrates, home equity linked debt and CDOs were the primary drivers behind the growth in asset-backed securitizations between 1985 and 2011. The Securities Industry and Financial Markets Association notes that the inclusion of home equity in asset-backed security totals instead of mortgage-related totals is based on the market’s classification. Similar to other asset-backed securities, CDOs pay investors from cash flow generated by its underlying collateral. Unlike other asset-backed securities, the underlying collateral of a CDO can be composed of various assets and even other derivatives. However, according to Figure 2 of research from the Federal Reserve Bank of Philadelphia, home equity accounted for nearly 70.0% of the CDO balance in 2007 and other, non-commercial mortgage backed securities accounted for roughly another 10.0%.

In 1985, asset-backed securities were solely linked to automobile loans and equipment loans. However, by 1999, home equity-backed securities accounted for the largest portion of outstanding asset-backed securities at 34.8%. CDOs meanwhile, accounted for 14.3%. By 2006, home equity-backed securities outstanding peaked at 39.8% and the combination of home equity-backed securities and CDOs represented 69.3% of the market. The combined share of home equity-backed securities and CDOs climbed to 69.9% in 2007 as the decline in home equity-backed securities was offset by continued growth in CDOs. Meanwhile, structured securities backed by automobile loans fell from 93.6% in 1986 to 6.1% in 2007 while those linked to credit card loans, which rose to 55.6% of outstanding asset-backed securities in 1990, represented 10.9% of this market by 2007. Since 2006, the share of outstanding asset-backed securities linked to home equity has declined by 12.3 percentage points to 27.5%. Over this six-year period, the outstanding amount of other asset-backed securities, especially CDOs also fell, but the outstanding amount linked to home equity declined more quickly. However, at its 2012 level, securitizations of home equity-backed securities and CDOs, the two largest categories of outstanding asset-backed securities, account for 63.3% of outstanding asset-backed securities while at 13.7%, student loans are a distant third.

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