Debt Burden and Delinquencies Ease

In this section of Spotlight we examine the charges of some alarmists that consumers are over-burdened with debt. In short, are we "going to hell in a handbag loaded with debt?" As we have noted above, interest rates have been low for some time, and financial arrangements have been made in an economic culture of low interest rates. For example, if homeowners need some quick cash, they take out a home equity loan at fairly comfortable rates. Suppose that interest rates increase by just 100 basis points. John Makin of the American Enterprise Institute asks: "Can we survive a recovery?"

Consumers' debt burden is best measured as the percentage of their payments on debt to their disposable (after-tax) income. The table below shows that debt burden peaked in the fourth quarter of 2001 at 14.41 percent of disposable personal income and had declined by 56 basis points a year later. Note that payments on mortgage debt are not squeezing out payments on consumer debt. In the fourth quarter of 1997, mortgage payments comprised 44.0 percent of total debt-service payments on household debt and increased only slightly to 45.3 percent in the fourth quarter of 2002. However, we need to add a large note of caution. These data reflect the current environment of unusually low interest rates.

Note: Components may not add to totals because of rounding.
Source: Federal Reserve Board

If consumers are over-burdened by their debts, that problem should be reflected in rising delinquencies on consumer debt. However, with the notable exception of bank card products, that is not the case. The Federal Deposit Insurance Corp. has released its fourth-quarter data on delinquency rates of various types of consumer credit provided by commercial banks. We can compare these data with the same categories at the end of 2001.

The table below shows that delinquency rates on most categories of consumer and real estate credit were lower at the end of 2002 than at the end of 2001. The only exception was credit cards, where the aggregate delinquency rate was slightly higher at the end of 2002 than at the end of 2001 (2.73 percent vs. 2.69 percent). The higher delinquencies were concentrated mainly in the portfolios of the largest banks, whose delinquency rates on credit cards rose to 2.69 percent from 2.59 percent. However, in both years, banks that reported the highest delinquency rates on credit cards were those with assets ranging from $100 million to $1 billion. The lowest delinquency rates reported were those on home equity loans, where delinquency rates dropped from 0.91 percent in 1991 to 0.60 percent in 1992.

Source: Federal Deposit Insurance Corporation

The profitability of FDIC-insured commercial banks increased during the last calendar year. Return on assets rose from 1.15 percent in 2001 to 1.35 percent in 2002, and return on equity rose from 13.12 percent to 14.53 percent over the same period. Net interest margin increased from 3.91 percent to 4.09 percent.