November 28 2010 (Chris Moore)

The Federal Reserve Bank of New York released its Quarterly Report on Household Debt and Credit this week for the third quarter of 2010. The report revealed that consumer debt continues its downward trend of the previous seven quarters, though the decline slowed in the last quarter.

Since the third quarter of 2008, consumers have shed a total of $1 trillion from outstanding consumer debt.

The report for the first time addressed the question of how this decline was achieved with the findings suggesting that consumers have been actively reducing their debts by paying them down and not just by defaulting.

According to data available through the end of 2009, the payoff of debt by consumers reduced their cash flow by about $150 billion. Even accounting for defaults and charge-offs, it was the first time since 2000 that non-mortgage debt has fallen. Consumers also paid down nearly $140 billion in mortgage debt from the beginning in 2008 through end-of-year 2009.

By contrast, between 2000 and 2007, borrowing had contributed more than $300 billion annually to consumers’ cash flow.

Donghoon Lee, senior economist in the research and statistics group at the New York Fed stated, “Consumer debt is declining but only part of the reduction is attributable to defaults and charge-offs. 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.”

The report also noted the following items:

– Household delinquent debt continues to decline and currently account for about $1.3 trillion or 11 percent of consumer debt, representing an 8.2 percent decline from a year earlier.

– The proportion of current mortgage balances that transitioned into delinquency rose slightly from 2.6 percent to 2.7 percent, after about a year of decline.

– About 457,000 individuals received home foreclosure notices on their credit reports between July 1 and September 30, 2010, a 5.5 percent decrease from the second quarter and a 6.4 percent drop from a year earlier.

– The number of new bankruptcies noted on credit reports fell 16 percent from the previous quarter (from 621,000 to 522,000), but is 1 percent higher from a year earlier.

Tags: federal reserve, consumer debt, mortgage debt, non- mortgage debt, delinquent debt, payoff of debt, foreclosure notices, credit reports