This weekend I had a little panel discussion with blogger Russ Winter, and analyst Steve Northwood. It’s served in three parts. Be sure to download and listen to all three. You can get them by clicking the link to Wall Street Examiner Radio at the top of the page, or here.
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There was something that I missed picking up on during the podcast.Russ mentioned that revolving home equity was up $20 billion over the last quarter. Indeed, that’s what the Fed data on commercial banks (H8) shows. But the devil is in the details.
The footnotes to the report noted for the week ended 10/4 a massive transfer of assets from the non-bank sector to the banking sector. Here’s the footnote posted in the 10/13 report:
Notes on the Data
Large domestically chartered commercial banks acquired $97.7 billion in assets and liabilities of nonbank institutions in the week ending October 4, 2006. The major asset items affected were (in billions): Treasury and Agency securities, investment account, mortgage-backed, $37.6; other securities, investment account, other, $1.4; commercial and industrial loans, $3.1; real estate loans, revolving home equity, $17.5; real estate loans, other, other residential, $4.6; real estate loans, other, commercial, $14.0; consumer loans, other, $3.1; lease financing receivables, $1.2; interbank loans, other, $2.3; cash assets, $2.1; and other assets, $9.9. The major liability items affected
were: transaction deposits: $2.0; nontransaction deposits, large time, $9.3; nontransaction deposits, other, $56.8; other liabilities, $20.1; and the residual (assets less liabilities), $9.4. The memo items affected were: mortgage-backed securities, pass-through, $25.7 and mortgage-backed securities, CMO, REMIC, and other, $10.4.
The $17.5 billion increase in Home Equity is entirely accounted for by this shift of assets, and is not a gain for the system as a whole. In fact, adjusting for that asset transfer the revolving home equity category is actually down $5 billion.
The Consumer Lending category also shows week growth, consistently running at an annual rate of around 1.5% since late June, which is, of course, less than the inflation rate, and can be entirely accounted for by those accounts which are growing as a result of the monthly interest charges tacked on.
Drilling down a little deeper, credit card debt has increased by less than 1% over the past 12 months, and is essentially flat over the last quarter (down 1/3 of a percent). Other consumer loans, for things like cars and boats etc. are up just 1.7% over the last year.
The recent gains in refi cashed out can probably be accounted for by the rollup of closing costs penalties and fees into the new loan. The reason that borrowers are willing to pay a higher interest rate on the new mortgage is that many are using
“cash out” to pay off high interest credit card debt and car loans, thereby lowering their total debt load.
But this is scant relief. The overall debt burden remains crushing. And as evidenced by the flat revolving home equity, and flat consumer lending data, consumers have reached the end of the line. They may be willing, but they are no longer able to behave irrationally. As they begin to repair their balance sheets, willingly or unwillingly, the economy will be adversely affected. The crunch will come when declining real estate values prevent those in trouble from refinancing to reduce their debt burden. That day has arrived.