Household debt falls for the first time in 6 years

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Americans cut credit cards and other types of consumer borrowing in the second quarter as the pandemic froze the economy, lowering overall household debt for the first time in six years even as mortgage loans continued to increase.

Total debt fell 0.2% to $ 14.27 trillion from $ 14.3 trillion in the first quarter, the Federal Reserve Bank of New York said in a report released Thursday. The drop was driven by a drop in overdue credit card balances, which fell by $ 76 billion as closures limited consumer spending and households put aside more money to pay off debts.

Meanwhile, mortgage loans increased by $ 63 billion in the quarter to reach $ 9.78 trillion. Almost 70% of mortgage arrangements involved borrowers with a credit score of at least 760, the highest percentage since files began in 2003.

Record mortgage rates – average 30-year fixed-rate mortgage fees of less than 2.9% – have prompted Americans with good credit to refinance and lower their borrowing costs. But this opportunity was not available to everyone. Mortgage credit availability is down more than 30% from a year ago and close to its lowest level since 2014, according to the Mortgage Bankers Association.

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Lenders also tightened standards last quarter on credit cards, auto loans and other types of household debt, according to senior loan officers’ opinion poll on bank lending practices, released on Monday. .

Auto and student loan balances were roughly flat in the second quarter. The Coronavirus Aid, Relief, and Economic Security Act, the main pandemic relief effort approved by Congress in March, suspended student debt payments and accrued interest.

An unprecedented wave of one-time Washington checks, additional unemployment benefits, and generous loan forgiveness programs from lenders across the country have combined to help Americans stay current. The severe default rate on consumer debt halved between late March and late July, to 0.7%, according to data from credit bureau Equifax.

About 7% of student debt was more than 90 days past due or in default in the second quarter, up from nearly 11% in the first quarter, according to the New York Fed report.

“The protections afforded to American consumers through the CARES Act have prevented large-scale delinquency,” said Joelle Scally, administrator of the Center for Microeconomic Data at the New York Fed. “However, these temporary relief measures can also mask the very real financial challenges Americans may face.”

America’s six largest banks slashed profits by $ 35 billion last quarter to prepare for a surge in bad loans, but even they admitted they didn’t know just how bad things could turn out.

“At the moment, we don’t see anything that matches an unemployment rate of 11%,” Bank of America chief executive Brian Moynihan said on the bank’s earnings call last month.

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