Breaking New Records: Home Equity Delinquencies

A new report shows rising delinquencies on home equity loans and home equity lines of credit, as consumers struggle to manage their debt payments under increasingly tight economic conditions.

The world cheered in the summer of 2008, when Michael Phelps broke the record for the most gold medals earned in one Olympics games. Unfortunately, the record-breaking pace of home equity delinquencies in the U.S. is inciting an entirely different kind of emotion.

The American Bankers Association (ABA) has reported a startling rise in second mortgage debt defaults. The ABA's Consumer Credit Delinquency Bulletin indicates that home equity line of credit (HELOC) delinquencies rose to 1.15 percent, a record high. During the same time period, home equity loan delinquencies rose to 2.63 percent.

Distressed consumer debt

The news about rising second mortgage defaults was accompanied by similar data pertaining to other types of consumer debt. The ABA's bulletin cited a rise in the composite ratio, a metric that tracks eight separate categories of closed-end loans, including those for home equity, property improvement, direct and indirect auto purchase, marine, RV, mobile home, and personal. A 22 basis point increase drove the composite ratio to 2.90 percent, its highest level in 28 years.

Surprisingly, the bright spot in consumer debt for the third quarter was a decline in bank card delinquencies. Defaults fell 34 basis points to 4.20 percent. The ABA defines delinquencies/defaults as accounts that are 30 days or more past-due.

Shackles of recession

The ABA's chief economist indicated that the rising problems in consumer debt were likely rooted in the infirm housing market and poor employment picture. The difficulties in both segments of the economy have been well documented. Nationwide, foreclosures in 2008 rose 81 percent from the prior year. Housing values are off as much as 40 percent in certain parts of the country. The national unemployment rate has risen by 2.3 percentage points in the last 12 months.

Economists and experts are not predicting a recovery in either area just yet. Henry Cisneros, a former HUD chief, said he sees a housing recovery in 2010-as long as loan modifications can gain traction and slow down the foreclosure pipeline. As for unemployment, the financial media has tossed around the prediction of 9 or 10 percent unemployment by the end of this year.

Trend of conservatism

Fourth-quarter financial results from major credit card issuers Bank of America and Citigroup indicate that consumer credit card spending has declined measurably. While this is bad news for card issuers, it's an indication that consumers are more aware of the need to be conservative about their spending. The moderation in bank card delinquencies appears to support this conclusion.

You can't exactly cheer for a record-high in second mortgage delinquencies. But you can be hopeful that the emergence of a more responsible consumer is a good sign for the future.