In the first quarter of 2020, aggregate household debt in the United States reached an all-time high: $14.3 trillion. Q1 2020 was the 23rd consecutive quarter of increasing household debt, but balances took a downturn in Q2. The Federal Reserve Bank of New York’s Quarterly Report on Household Debt and Credit showed a $34 billion decline in aggregate household debt.
Though $34 billion sounds like a lot of money, the outstanding balance declined just .2%, from about $14.3 trillion to $14.27 trillion. In comparison, the Q1 increase was $155 billion. The drop was the first decline since mid-2014, but it’s difficult to tell exactly what these and other Q2 changes mean or whether the trend is likely to continue.
Which Types of Debt Declined, and Where?
Mortgage debt and student loan debt both increased during Q2. However, balances on home equity lines of credit (HELOCs) declined by $11 billion. And, credit card balances dropped by $76 billion.
Overall, non-housing debt declined by $86 billion, while housing-related debt rose $52 billion.
Household Debt in California
Among the 10 states the report broke out in detail, California had by far the highest per capita debt, at more than $70,000. That’s mostly attributable to California mortgage debt being significantly higher than in other states.
By most measures, though, California fared well. Among the states analyzed, the state of California:
- Had the lowest percentage of aggregate debt transitioning to 30+ days past due
- Had the lowest percentage of debt transitioning to 90+ days past due
- Had the lowest percentage of the aggregate balance at 90+ days past due
- Had among the lowest percentages of mortgage debt 90+ days past due, at less than 1%
California isn’t the only state with positive developments. Aggregate delinquency rates dropped a full percentage point between Q4 of 2019 and June 30, 2020. As of the end of 2019, 4.6% of consumer debt was delinquent. At the close of Q2 of 2020, that percentage had dropped to 3.6%.
That dip reflects not just a decline in new delinquencies, but a shift in the opposite direction: more than 61% of mortgages in early delinquency transitioned back to on-time status during Q2.
This sounds like great news nearly across the board. But, there are unusual factors in play.
Special Variables Affecting Debt and Delinquency
The CARES Act and State Protections
The first and most obvious new variable in the mix is the range of assistance and protections offered to American consumers due to the pandemic. For example:
- Enhanced unemployment benefits offered through the end of July boosted household income for many, reducing or eliminating the need to rely on credit
- U.S. families received more than $200 billion in stimulus funds
- The moratorium on foreclosure on federally-backed mortgages not only prevented many mortgages from entering delinquent status, but re-set some to current status
- The administrative forbearance impacting most student loan debt prevented most new transitions to delinquent status
- Some lenders voluntarily offered forbearances or other assistance to customers experiencing difficulties due to the pandemic
These measures offered short-term relief to millions of Americans–a combination of supplemental income that decreased the need to rely on credit for necessities and forbearances and similar protections that prevented accounts from moving into delinquency.
But, the unemployment rate nationwide remains above 10%, and supplemental unemployment benefits have expired. In California, that means the average weekly benefit amount has dropped from $1,245 to $645. At the same time, many federal and state protective measures are expiring. Unless assistance and protective measures are extended, we will likely see a cascade of new delinquencies, foreclosure actions, motor vehicle repossessions and other negative developments.
Shrinking Access to Credit
While new mortgage originations were up, the credit scores associated with those new loans were higher–up 11 points from Q1 and 25 points year-over-year. Aggregate credit limits on HELOCs remained stable, and auto loan credit declined.
The most significant downward shift was in credit card credit, and it wasn’t just a tightening of access to new credit. During the spring and early summer, tens of millions of Americans saw their credit card limits slashed or accounts closed altogether. The aggregate credit card limit dropped by $53 billion.
California Bankruptcy Filings
After starting the year consistent with prior year filings, bankruptcy petitions dropped off in March, and were down dramatically in April. Chapter 7 filings in April of 2020 were more than 46% lower than the same month during the previous year. Chapter 13 filings were down more than 75%.
The income boosts and consumer protections described above likely played a role in the decline. But, there were practical hurdles as well, particularly during the early, more restrictive phases of the shutdown. Filings have been slowly moving back toward 2019 levels, particularly for Chapter 7 cases. With protections against foreclosure and evictions falling away, it’s likely those numbers will increase sharply in the next month or two.
Financial difficulties can be stressful and confusing in the best of times. Virtually no one would argue that 2020 has been the best of times. The uncertainty of the job market, the lack of clarity about whether and when additional assistance will be forthcoming, and concerns about continuing public health concerns make it even more difficult to confidently make decisions.
At Borowitz & Clark, we’ve been helping people resolve debt problems for decades. We know this is a difficult time, and want to give you the benefit of our experience. You can schedule a free consultation by calling 877-439-9717 or filling out the contact form on this page.