Investors Have the Jitters, Consumer Borrowing Rises

Investors weren't encouraged by events late last week, especially the latest from the cauldron of rumors in Europe. According to the Fed, consumer borrowing was up by $12 billion in July. And the Obama administration is planning a revamp of the Home Affordable Refinance Program, which has thus far proved underwhelming.

September 12, 2011
By Dees Stribling, Contributing Editor

Investors weren’t encouraged by events late last week, especially the latest from the cauldron of rumors in Europe. By the end of the day on Friday, the Dow Jones Industrial Average had lost 303.68 points, or 2.69 percent. The S&P 500 declined 2.67 percent and the Nasdaq was down 2.42 percent.

One of the triggers of the decline seemed to be the abrupt resignation of Jürgen Stark, a German member of the European Central Bank. A few years ago, such an event would have been about as newsworthy as the repaving of a side street, but all eyes are on the ECB these days, and on the growing feelings of ill-will in Germany toward the euro.

There are worries closer to home as well. Bank of America, for one, seems to be going all wobbly. At the very least, the bank — which is Lehman-sized in potential impact if it fails, meaning it’s too big to fail — will probably shed enough employees in the near future to have a measurable impact on U.S. unemployment.

Car-Buying Inspired Consumer Debt Uptick

Consumers might be grumpy — and have reason to be, considering their pay hasn’t been going up at all lately when indexed for inflation — but they’re borrowing more anyway. According to the Federal Reserve late last week, in fact, consumer borrowing was up by the most since before the Panic of 2008, rising by a total of $12 billion in July compared with June, when the increase was $11.3 billion.

The increase was spurred by an increase in car sales, which sold in the United States at an annualized rate of 12.2 million units in July, compared with 11.4 million in June. Thus non-revolving debt, with includes auto loans as well as student loans, rose by $15.4 billion during July. Revolving debt, on the other hand, dropped $3.4 billion. Consumers are using less plastic.

Over the last 13 months, the total non-revolving loan balance for U.S. consumers has grown 5.3 percent. Auto sales have not, however, been the main factor in driving growth since mid-2010. Instead, student loans — a business now entirely run by the federal government — have. Because of this growth, the federal government is now the third-largest holder of non-revolving debt, after financial companies and banks.

Administration Mulls HARP Overhaul

The Wall Street Journal reported on Friday that the Obama administration officials are planning a revamp of the Home Affordable Refinance Program, which has thus far proved underwhelming in helping borrowers take advantage of low mortgage interest rates. In the early days of HARP, it had been hoped that 4 million or even 5 million mortgage-holders would refinance under its provisions. But only about 838,000 borrowers have done so, and among those, fewer than 63,000 were significantly underwater.

No specific fixes to HARP have been publicly announced, but the paper did report that administration officials have been in discussions with mortgage bankers lately about changes in the program to deal with a major sore spot, as far as the bankers are concerned. Namely, the risk that lenders would be stuck with loans that they refinanced if riskier borrowers defaulted anyway.

A window of opportunity currently exists for much more refinancing, which could theoretically free up many billions of dollars for consumers to spend. As of last Thursday, the latest survey of mortgage rates by Freddie Mac put the average at 4.12 percent. Mortgages haven’t been that cheap since just before the Kennedys moved into the White House.