Credit Divide

We all know about the dreaded “Fiscal Cliff.” Now there is also the “Credit Divide.” In Monday’s WSJ Jon Hilsenrath coined the phrase and explained: “In previous downturns, the lowered interest rates triggered broad waves of mortgage refinancing and new borrowing. The spending that resulted helped power the recoveries. This time around, many would-be borrowers with lower incomes or blemished credit histories are finding it difficult and more costly, or sometimes impossible, to refinance their mortgages or get new loans.” Let’s review some of the developments in consumer finance that might account for the Credit Divide:

(1) Mortgage activity indexes are mixed. The good news is that record low mortgage rates are starting to boost the refinancing index compiled by the Mortgage Bankers Association. It rose during the week of June 15 to the highest reading since April 2009. The bad news is that the index of mortgage applications for new purchases has been stalled at the lowest level since the mid-1990s for the past three years. Overall home mortgage net lending continued to contract during the first quarter, as it has been doing since Q4-2008.

(2) Negative home equity is a major cause of the Credit Divide. Households with negative equity can’t refinance their mortgages to take advantage of record low rates. The Fed’s Flow of Funds data show that owners’ equity in household real estate has been hovering around $6 trillion since late 2008. It is down a whopping 50.4% from its record high of $13.5 trillion during Q1-2006. Prior to Q4-2007, homeowners’ equity exceeded outstanding mortgage loans. Since then, households have collectively owed more than the equity in their homes. Prior to Q4-2007, owners’ equity exceeded 50% of the value of household real estate. It was down to 40.7% during Q1-2012.

(3) Consumer credit is expanding again. Revolving credit (i.e., credit card debt) is growing again, but very slowly after falling by $177 billion from July 2008 through April 2011. Since then, it is up by $11.4 billion. Nonrevolving credit is expanding more rapidly. Auto loans are rising along with auto sales. However, the fastest-growing component of consumer credit is student loans. That’s certainly contributing to the Credit Divide. College graduates who are saddled with large tuition debts are less likely to qualify for auto and mortgage loans.

Today's Morning Briefing: Credit Divide. (1) The Fed’s epiphany. (2) Running out of options. (3) Could the economics textbooks be wrong? (4) The Credit Divide examined. (5) Refinancing activity is rebounding. (6) Mortgage lending isn’t. (7) Homeowners’ equity has plunged 50%! (8) Consumer credit led by student loans. (9) Fed’s financial repression is depressing interest income. (10) Is the summer rally over already? (11) Germans and Greeks. (More for subscribers.)