May 14, 2014

Rising household debt could provide boon to loan sales

Household debt rose during the first quarter, according to figures provided in a report from the Federal Reserve Bank of New York. In addition, the data reveals consumers did a better job of paying off their loans in the first three months of the year, with delinquency rates for most types of credit declining in the period.

Household debt rises in first quarter
During the first quarter, household debt increased $129 billion to $11.65 trillion, according to a report from the Federal Reserve Bank of New York. This represented a 1.1 percent gain from the same time in 2013. In addition, this was the third consecutive quarter that household debt moved higher.

The different types of credit did not grow evenly, and a handful of measures actually declined during the period. For example, credit card debt fell by $24 billion. In addition, balances held on home equity lines of credit dropped by $3 billion.

While these two measures moved lower, student loan debt rose by $31 billion and credit extended for automobiles grew by $12 billion. Mortgage debt grew by $116 billion, but originations of these loans dropped to $332 billion, which was their lowest in more than two years.

Fed economist notes progress
Andy Haughwout, vice president and economist of the New York Fed, commented on the situation in a statement.

"We've observed household debt increase three quarters in a row and delinquency rates at their lowest levels since 2008," he said. "However, the direction of future mortgage originations will have an important implication on the household financial outlook and we will continue to monitor it."

Market experts voice concerns
While consumer credit did move higher during the period, the Fed economist is not the only one who voiced concerns about the future borrowing activities of Americans. One could interpret the recent Fed figures as showing that consumers are reluctant to take on debt, according to The Wall Street Journal. Younger individuals in particular may be shying away from from credit to purchase items like homes and automobiles.

"There's some hesitation about reloading on debt at a time when the economy is still facing just moderate growth," RBS economist Omair Sharif told the news source. "I'm not sure the demand is really there for boosting your level of debt when you just spent years working it down."

Many consumers became more careful with their spending in the years following the financial crisis, according to Reuters. However, the data contained in the Fed report seems to show that they are opening up the purse strings and becoming more open to making purchases.

In the event that household debt keeps growing like it has over the last three quarters, this development could serve as a boon to loan sales by increasing the supply of credit. Financial institutions that are interested in getting involved in these transactions might consider contacting Garnet Capital Advisors, which has significant experience in this space.