Balance Sheet Repair In Action

You may have heard of the term “Balance Sheet Repair” bandied about on the news from time to time, but what does that mean and what does it look like?  The Big Recession* has given us an excellent illustration of balance sheet repair, so let’s take a look.

2011Q2 - Total Balance by Delinquency Status - Source: FRBNY Consumer Credit Panel/Equifax, page 8

Source: FRBNY Consumer Credit Panel/Equifax

Here’s a chart from the Federal Reserve Bank of New York’s most recent Quarterly Report on Household Debt and Credit.  Now, before you freak out and say “Goodness!  It looks like half of all balances are delinquent!”, take a look at the y-axis.  It shows that 90% of all balances are current and only about 10% are delinquent.

Notice that the current accounts have increased by what looks to be a few percentage points over the past year-and-a-half.  This suggests that borrowers are getting control over their payments.  That’s good.  Now, take a look at this:

2011Q2 - New Delinquent Balances by Loan Type - Source: FRBNY Consumer Credit Panel/Equifax, page 8

Source: FRBNY Consumer Credit Panel/Equifax

I wonder if we still have an unaffordable mortgage problem?  Granted, things aren’t as bad as they were, but still.

These charts show on aspect of balance sheet repair in action over a huge borrowing population.  People are reducing expenses and (hopefully) increasing income in order to keep their loans in good standing and reduce outstanding balances (not shown).  When I look at theses charts, it seems that larger numbers of people are in a position to service their loans.  Good!

That’s not all.  According to Eileen AJ Connelly AP as reported by The Huston Chronicle, credit card late payments hit 17-year low. According to the article:

“The overall improvements stem from a variety of factors, said Chet Wiermanski, global chief scientist for TransUnion’s financial services business.

‘Not only do we have consumers that are using their debt more responsible[sic] and taking out less debt, they’ve also cut back on the number of the cards they carry,’ he said.”

So, it appears that the U.S. consumer is “deleveraging”, a term that means that they are taking liabilities off their balance sheets (hence “Balance Sheet Repair.”)  But don’t chalk it all up to the consumer.  Eileen writes:

“After writing off record levels of uncollectible debt in recent years, most banks won’t issue cards to applicants with low credit scores. They have also cut back credit limits on existing cards, making it harder for individuals to run up huge balances.”

Some wonder how long this balance sheet repair will last.  The hopeful part of me wants to think that people have learned this time, and that more financial houses will be in order.  The cynic in me says it will last only as long as there is fear for the financial future and banks are reticent to lend.  Which I doubt will be that long.

And that’s “Balance Sheet Repair.”

*  I’m not calling it the “Great” Recession, because there’s nothing great about it.  It’s just big (and ugly.)

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