More Americans Paying Off Debt and Opening New Lines of Credit
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As more people are paying off debt across the country, more of us are taking out loans than we have in recent years.
Not including mortgages, loan originations increased from $659 billion in 2011 to $750 billion in 2012, according to a recent Equifax Credit Trends report. However, loan originations are still down from their pre-recession peak in 2006 by more than $400 billion. These dollar amounts highlight the idea that we are on the road to recovery—but that there is yet more road to travel.
There are many explanations for this—fewer people were taking out home loans because they lost equity or were underwater in their homes, more people put off purchasing new vehicles because they were worried about the economy, and so on—but the drop in loan originations generally is tied to economic factors. With the economy diving into recession, many people suddenly found themselves unemployed or income-insecure. They were worried they would lose their jobs, or they were facing furloughs or cutbacks in both hours and benefits.
Since the recession, which lasted about from December 2007 through June 2009, lending has increased, starting in 2010. Post-recession, auto loans have increased the most, but credit cards have also seen gains over the past year.
For the housing market, loan origination is still quite low. It’s growing, but at a very slow pace, largely due to the tough standards banks and other lenders have instituted since the recession took hold.
Many of the causes behind the recession, particularly in the housing sector (which constitutes about three-fourths of consumer debt), involved people taking on more debt than they could reasonably afford. As a result, lenders got strict about to whom they would lend—a trend that likely will not change in the near future, regardless of what kind of economic recovery we see.
Still, first mortgage originations have been increasing, thanks in part to people hoping to take advantage of low interest rates. By mid-2012, about 4.25 million first-mortgage starts were on the books, compared to about 2.5 million at the same time in 2011.
The strict underwriting standards are affecting who qualifies for those loans: About 80 percent of recent mortgage originations are comprised of prime risk consumers—those who carry little lending risk and therefore have credit scores of at least 700. By comparison, in 2006, only about half of first mortgages were taken out by those with credit scores above 700.
2012 was also the first year that home equity revolving lines increased, tracking alongside reports that home prices have increased over the last year. While this is good news on the home market front, it’s worth pointing out that the $65.5 billion in loans taken out in 2012 is a mere fraction of the $295.2 billion taken out in 2006.
Despite the increases in the number of mortgages, the amount of mortgage debt Americans are carrying as a whole has steadily decreased since its peak near the end of 2008, when Americans had $9.8 trillion in mortgage and home equity debt. That number is down by 14 percent to $8.4 trillion, due largely to foreclosures and in part to Americans paying down mortgage debt at a faster pace than they are taking it out.
Consumer debt, which does not include mortgage debt, has actually seen the opposite trend. It has been trending upward since 2010, reaching $2.51 trillion at the end of December 2012 (still down from the $2.57 trillion high in 2008).
It’s clear that consumers have been more willing to borrow money recently, but the mortgage market still lags behind the rest of the country’s recovery. Lenders are also more willing to offer loans, but they continue to have tough standards when it comes to mortgages.
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