As HELOC Delinquency Rates Hit A Record, Are Student Loans Next?
Today the Fed released its quarterly report on household debt and credit, which merely recaps already public data but with some additional nuances. While the focus of the report is on the purported ongoing consumer deleveraging, what has to be highlighted once again is that the bulk of the consumer "deleveraging" is primarily at the mortgage debt level, which as the NY Fed's blog has shown, and the reason why we quotation marks above, is because the majority of the debt 'reduction' for the third year running is due to debt discharge, i.e., forced reductions in debt arising out of default, bankruptcy and other contract termination events, and not due to actually generating incremental equity (cash) used to repay debt.
And while we will allow readers to peruse the full slideshow presentation at their leisure below, two things need pointing out. First: as we have been harping on for over a year, consumers may be getting their mortgages and credit cards discharged, because these are non-recourse, and the only trade off is a hit to one's credit rating, but their student loans keep piling up, and according to the Fed was just shy of $1 trillion at the end of Q2, a number which has since surpassed the psychological barrier. The chart below shows that there is no other place student debt is going except up and to the right...
But the punchline is comparing student debt to one other favorite product of the housing bubble generation: HELOCs. We note home equity lines of equity because as of June 30, 2012, long after HELOCs were widely available to Americans locked in a rabid pursuit to extract as much equity as they could out of their homes, is when the 90+ day delinquent rate on this product hit an all time high of 4.92%, and is finally rising at a breakneck speed. What is fascinating is when one re-indexes the delinquency rate on HELOCs and student loans. While we admit that the "discharge" option on real estate-backed debt does have a material impact, the reality is that once the prevailing mode of thinking is one of just not paying one's student loans, it will be not the student loan chart which is already parabolic, but that which tracks delinquent student loans that will take its place in the exponential hall of fame.
Note the surge in HELOC delinquencies now that the HELOC product is no longer a fad, and consumers can't wait to stop paying back debt which will never be worth even one cent courtesy of the secular loss of real estate value and pervasive underwater prices. The flat line is student loan delinquencies. Soon to quite soon the black line will start imitating the red one. At that moment, run.
The full NY Fed consumer debt presentation below (pdf)