Consumers Still Leery of Credit

U.S. consumers continue to pursue an entirely rational approach to the not-quite-over recession, especially that part about continuing high unemployment and underemployment, by cutting back on borrowing.

April 8, 2010
By Dees Stribling, Contributing Editor

Courtesy Flickr Creative Commons user epicharmus

U.S. consumers continue to pursue an entirely rational approach to the not-quite-over recession, especially that part about continuing high unemployment and underemployment, by cutting back on borrowing. Economists and retailers are expressing some consternation at this.

According to the Federal Reserve on Wednesday, consumer borrowing fell by an annualized rate of 5.6 percent in February to $2.45 trillion, following a 2.1 percent increase in January. But that was just after Christmas; now borrowers are back to belt-tightening. Revolving credit, largely credit cards, fell an annualized 13.1 percent, while loans for cars, boats, education and the like (not including mortgages) dipped a more modest annualized rate of 1.6 percent.

Still, borrowers have a long way to go to roll back to the debt totals of only 10 years ago. Around 2000, outstanding consumer credit was about $1.5 trillion. All during the 2000s–the days of McMansions and Hummers, one might call them–non-mortgage credit ballooned to a peak above $2.5 trillion.

SEC Wants New MBS Rules

The Securities and Exchange Commission voted unanimously on Wednesday to propose comprehensive new rules for the securitization market. Included in the proposals, which are now open to public comment, are regulations designed to prevent a repeat of the irrational exuberance associated with MBS before mid-2007.

If enacted, the new rules would make lenders state how they confirmed borrowers’ incomes; “Yep, we sure did check,” wouldn’t be sufficient any more. Also, securitizers would have to offer computerized loan-level data about their products to would-be investors on an on-going basis.

Another change would involve CEO certification that the assets to be securitized ought to perform as advertised–a kind of psychological skin in the game. But the SEC wants a little more than that kind of skin. It’s also asking for lenders to retain 5 percent skin in the game for each of the loans they make for securitization.

More Than a Million Households Have Vanished

“What Happens to Household Formation in a Recession” is the name of a new study by Gary Painter, sponsored by the Research Institute for Housing America, which was released by the Mortgage Bankers Association on Wednesday. That giant whooshing sound most of us have heard lately is the sound of households gone with the economic wind.

According to the study, some 1.2 million households disappeared from 2005 to 2008, despite the population increase during those years of 3.4 million. “With such a significant drop in households nationwide, it is clear the most recent recession impacted individuals’ decisions to move out on their own and caused many Americans to join already formed households,” said Gary Painter, an associate professor in the School of Policy, Planning and Development at USC, in a statement.

The decline in household formation affects not only home sales, but apartment vacancies (now as high as they’ve been since the mid-80s) and retail prospects, since householders have a way of buying things to put in their dwellings, be they owned or rented.

And there are more losses to come, once the impact of 2009 is tallied. “Due to data limitations, my analysis had to focus on household formation as of 2008,” explained Painter. “Clearly, given the depth of the downturn in 2009, and the ongoing weakness in the job market through the beginning of this year, this study gives no reason to expect that household formation has picked up at all.”

Wall Street had a down Wednesday, with the Dow Jones Industrial Average losing 72.47 points, or 0.66 percent. The S&P 500 retreated 0.59 percent, while the Nasdaq was down 0.23 percent.