Wednesday, July 7, 2010

Consumer Loan Delinquencies Continue Broad-Based Improvement in First Quarter

First quarter results from the ABA’s Consumer Credit Delinquency Bulletin make it clear that consumer balance sheets are improving. People are borrowing less, evident in the lowest financial obligation ratio since the second quarter of 2000, saving more and building wealth. These are all positive signs.

The bulletin reveals broad-based improvement in consumer loan delinquencies for the third quarter in a row. The composite ratio, which tracks delinquencies in eight closed-end installment loan categories, fell 21 basis points to 2.98% of all accounts from 3.19% of all accounts in the previous quarter. Delinquencies in dollar terms for the composite ratio, as shown in the chart below, fell to 3.09% from 4.01% in the fourth quarter.

Bank card delinquencies fell more than half of one percent to 3.88% of all accounts, which is below the 15-year average of 3.93%. This is the first time since the second quarter of 2002 that bank card delinquencies have fallen below 4%.

Home equity loan delinquencies fell for the first time in two years to 4.12% of all accounts from 4.32% in the previous quarter. Home equity lines of credit delinquencies fell nearly a quarter percent to 1.81% of all accounts from 2.04% in the previous quarter. Property improvement loan delinquencies fell to 1.40% of all accounts from 1.63% in the previous quarter.

Across-the-board improvements in housing-related loan delinquencies indicate stability is returning to the housing market. This is the first inkling that stability is taking hold in the housing market, but the pace of recovery will still be long and drawn out.

The overall risk in banks' consumer loan portfolios is improving and will continue to do so. Banks are putting losses behind them and following a prudent approach to new loans because the on-again, off-again economy is keeping risk high. Regulators are also demanding that banks remain cautious. With job growth creeping back slowly and personal incomes rising a bit, I'm hopeful that improvements in consumer delinquencies will continue.

The ABA report defines a delinquency as a late payment that is 30 days or more overdue.

Click here for ABA's press release.

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