U.S. consumer debt continues to shrink, although at a somewhat slower pace than over the past two years, the New York Federal Reserve has reported. 

Consumer debt fell in the third quarter of the year, making eight straight quarters of decline. Overall, U.S. consumer indebtedness has declined by nearly $1 trillion over the past two years, according to the New York Fed’s third quarter report on household debt and credit, released Monday.
Although much of the decline is due to banks writing off bad debts, there are also signs that consumers have been taking steps to reduce their debt loads as well. Non-mortgage debt, excluding bad loans, fell for the first time since 2000. Payoff rates on existing mortgage debt have exceeded new mortgage debt since 2008, with net mortgage debt paydowns totaling $140 billion by the end of 2009.
“Consumer debt is declining but only part of the reduction is attributable to defaults and charge-offs,” said Donghoon Lee, a senior economist with the New York Fed. “Americans are borrowing less and paying off more debt than in the recent past. This change, which we continue to study carefully, can be a result of both tightening credit standards and voluntary changes in saving behavior.”

Cash flow reduced $450 billion

The difference between paying off debt and consumer borrowing has reduced consumer cash flows by about $450 billion annually, the New York Fed estimates. Data through the end of 2009 show that paying down debt has reduced consumer cash flows by $150 billion, whereas borrowing contributed about $300 billion a year to consumer cash flows from 2000 to 2007.
The New York Fed also reported that foreclosures were down in the third quarter of 2010, with foreclosure notices appearing on 457,000 individual credit reports from July 1 to September 30, down 5.5 percent from the second quarter of the year and 6.6 percent from one year ago. Newly delinquent mortgages increased slightly, to 2.7 percent from 2.6 percent the previous quarter, although this may be due to seasonal factors.
Delinquent household debt has been declining and currently totals $1.3 trillion, down 8.2 percent from one year before and representing 11 percent of all household debt. Reported bankruptcies were down 16 percent from the second quarter of the year, to 522,000, but were up 1 percent from a year earlier.
The next quarterly report is scheduled to be released on Feb. 14, 2011.

Published on November 9, 2010