MARCH 2004

Improvement in Account Performance

The most recent indices of consumer credit performance showed continued improvement. Moody’s Investors Services reported that its measure of the rate of credit card loans past due 30 days or more was 5.20% in November 2003, down 27 basis points from the same month in 2002. November registered the fourth straight month of year-over-year improvement in the delinquency index. (See Figure 1 and Figure 2). The Moody’s index is based on the performance of nearly $390 billion of securitized credit card receivables. Confirming this favorable trend, Fitch Ratings reports that its 60+ days credit card delinquency rate for the December collection period fell to 3.32% and marked its third consecutive month of year-over-year improvement. Both measures portend a brighter outlook for chargeoffs over the coming year. Chargeoffs had escalated sharply in late 2002 and through mid 2003, but the growth had flattened considerably by November 2003.

A favorable trend is also present in mortgage delinquency rates. The overall seasonally adjusted residential mortgage delinquency rate for the third quarter of 2003 hit a three-year low of 4.28%. In fact, delinquency improved for all categories of mortgage loans. The Mortgage Bankers Association’s third quarter 2003 National Delinquency Survey showed a 6.7% decrease in the conventional loan delinquency rate versus the second quarter. The delinquency rate for prime conventional loans fell to 2.45% —an improvement both over the previous quarter and the previous year (15 and nine basis points, respectively). Figure 3 shows that the 30+ days prime conventional loan delinquency rate has experienced improvement, year over year, for six consecutive quarters.

While Fitch "...expects prime consumer credit quality to stabilize at elevated levels before improving later in the first half of 2004..." it notes concern about consumer debt repayment ability in a rising interest rate environment and uncertain job market. Moody’s echoes this sentiment: "household debt service ratios and personal bankruptcy filings are at near-record highs, thereby posing a concern that consumers are overextended."

In contrast, in her remarks before the New York Forecasters Club in late February, Federal Reserve Board Governor Susan Schmidt Bies offered a "relatively upbeat assessment of [and outlook for] household credit quality...." Among the evidence cited: 1) the Fed’s ratios of repayment obligation both rose during the 1990s, peaked in late 2001, and in the most recent data available (third quarter 2003) marked their lowest level since then; 2) the increase in the personal bankruptcy filing rate over the past 20 years reflects not only changes in household financial stress, but can also be attributed to changes in the law allowing higher exemptions, a decline in the social stigma attached to filing, and the extension of credit to riskier borrowers; 3) the Fed’s quarterly Senior Loan Officer Opinion Survey on Bank Lending Practices demonstrates that lenders remain confident in their assessment of household credit quality in that "...banks have not materially changed their lending policies for consumer loans over the past couple of years."; and 4) the ratio of household net worth to disposable income in 2003 was "...slightly above its long-term average." This was fueled in part in 2003 by the fourth consecutive year of a greater than 7.5% appreciation in single family home prices.

Fed Chairman Greenspan recently remarked on the importance of noting both asset and liability activity when assessing the debt service burden of households. In fact, he noted, debt service ratios have remained stable over the past ten years and therefore "...do not suggest increasing household financial stress."

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