Giving Credit Where Credit is Due

"First in, last out" is a well-known accounting term, and it may also be the right phrase to characterize this economic recovery. Even though the economy began to expand in mid-2009, the sector that led us into the mess—credit—has remained in recession. The conflagration of debt—soured mortgages, defaulted bank loans, Chapter 11 corporations, huge credit-card charge-offs, student loans, auto loans—drove the economy into a deep recession. Now, nearly a year into the overall economic expansion, there are tentative signs that improvement is coming to the stricken world of consumer credit.

Take the biggest component of consumer debt: mortgages. The Mortgage Bankers Association recently released its data on the first quarter of 2010. It found the delinquency rate for residential mortgages rose to 10.06 percent in the first quarter, up substantially from the fourth quarter of 2009 and from the first quarter of 2009. But other measures suggest that the mortgage clouds have begun to break. TransUnion, the credit-data firm, reported last week that the mortgage-loan delinquency rate—defined as the percentage of borrowers who are two or more months late—fell in the first quarter of 2010 after three straight years of increases.

There are also signs that the foreclosure wave is beginning to abate. At a breakfast with reporters last week, Housing and Urban Development Secretary Shaun Donovan made some bullish comments. He noted that there was "real improvement in foreclosure starts," which were down 27 percent in April 2010 from April 2009. Since it can take 18 months for a foreclosure to go through the process, he predicted that completed foreclosures would remain high for the near future. "We're not out of the woods," he said. "But where we are today is remarkably different than where we were 15 months ago." RealtyTrac's latest report shows foreclosure filings of all types fell 9 percent in April 2010 from March 2010 and were down 2 percent from April 2009. In particular, RealtyTrac confirmed Donovan's claim that the pace of foreclosure initiation is declining. "During the month a total of 103,762 properties received default notices, a decrease of 12 percent from the previous month and a decrease of 27 percent from April 2009—when default activity peaked at more than 142,000."

There are signs that the situation with credit cards is also improving. TransUnion reported that the delinquency rate on credit cards (the percentage of borrowers who are more than 90 days late) fell to 1.11 percent in the first quarter of 2010, down from the fourth quarter of 2009 and down from the first quarter of 2009. Average balances fell as well. Part of the improvement can likely be ascribed to the practice of banks writing off debt as uncollectable when borrowers are 180 days late. But there are tentative signs that these "charge-offs" may be starting to decline, too. Capital One Financial said that in April, charge-offs fell to 9.68 percent of balances, or $451.7 million, from $510.9 million, or 10.87 percent, in March. Capital One also reported that the delinquency and charge-off rates for auto loans fell in April from March.

We shouldn't leap to conclusions based on a single month of data. It will take several months of continuing declines in delinquency rates from RealtyTrac, TransUnion, the MBA, and credit card companies to confirm a consumer credit recovery. (Readers should also check out the New York Fed's excellent credit map for a reality check.) And even if those data turn into a trend, there could be other forces at work. It may be that lenders are being more lenient with borrowers as part of an effort to avoid fresh write-downs. Or perhaps the numbers are improving simply because so many people have already been foreclosed upon and the mortgage and credit card industries haven't been making new loans. But it strikes me that these tentative signs of improvement signal that a strengthening economy and the renewal of job creation are enabling more people to stay current on debt obligations.

Daniel Gross is also the author of Dumb Money: How Our Greatest Financial Minds Bankrupted the Nation and Pop!: Why Bubbles Are Great For The Economy

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