Duke, Developments in the Landscape for Consumer Credit and Payments – Part 2

Changes in the Use of Payment Instruments

Consumer credit pricing and availability also appear to affect consumer preferences for different payment methods. When consumers decide how to pay for their purchases, they may have a variety of payment options to choose from, including cash, checks, debit cards, credit cards, prepaid cards, and even, increasingly, their mobile phones. The Federal Reserve has tracked changes in consumers’ use of payment instruments in a number of studies over the past decade. These studies cast an interesting light on the effects that weakened economic conditions have had on the mix of payments.

The number of checks processed in the United States has been declining since the late 1990s, as consumers, businesses, and governments have shifted away from checks and toward electronic payment methods. The annual number of checks dropped from more than 40 billion in 2000 to 30 billion in 2006, and we expect the data for 2009 to show continued declines.

At the same time, the use of debit and credit cards has risen. Debit card payments, in particular, have grown remarkably: Between 2000 and 2008, the number of debit card transactions grew at an annual rate of more than 17 percent, while the value of debit card transactions grew 15 percent per year. Credit card transactions have grown at a slower pace than debit card transactions over the same period–about 2 percent per year in number and roughly 5 percent per year in value. For smaller-value payments, both types of cards, but especially debit cards, have served as substitutes for checks and, very likely, cash. Although the nature of cash makes direct measurement of aggregate cash payments difficult, we can infer a trend in usage from changes in the level of small-denomination currency that is most frequently used in cash payments. The amount of small-denomination domestic currency in circulation has been steadily declining since the 1970s, leading us to believe that cash payments have similarly declined.

Most interestingly, the recent period of economic weakness appears to have caused some consumers to shift away from credit cards not only as a source of credit but also as a method of payment. As I said earlier, between late 2008 and early 2010, the value of credit card purchases declined 10 percent. In comparison, although the rate of growth in debit card use slowed during the recession, debit card transactions did not decline in either volume or value.

This shift from credit to debit makes sense from the perspective of the consumer. If credit is tight and consumption is contracting, consumers who are reluctant or unable to increase their debt levels can use debit cards to pay for current expenses out of current, rather than future, income. In addition, for individuals with existing credit card balances, interest must be paid on new purchases as well as on previous balances. Those individuals might seek to avoid interest charges on new purchases by using debit cards. This incentive is even stronger in the presence of higher credit card interest rates. Finally, some consumers might use debit cards to track their spending in real time when budgets are tight.

Tags: cash checks, cash payments, consumer preferences, credit card transactions, currency, debit card transactions, domestic currency, electronic payment methods, Federal, interest, Payment, payment instruments, percent, prepaid cards, rate, show, small-denomination, time, value, value payments

Duke, Developments in the Landscape for Consumer Credit and Payments – Part 1

Changes in Consumer Credit
During the recent financial crisis, the Federal Reserve and other policymakers throughout the government took unprecedented actions to mitigate the fallout from severely distressed market conditions and support the flow of credit to consumers and businesses. Nonetheless, the level of credit outstanding for households has been very slow to rebound and remains lower than it was at the onset of the crisis. The reasons for the slow rebound are, without a doubt, complex and multidimensional. Still, it is worthwhile to examine the data and try to understand why credit growth is not more robust.

For this forum, I have chosen to focus my discussion on factors affecting the overall movements in credit card debt. The bulk of revolving credit in the United States today is held in the form of credit card debt. As the financial crisis developed in late 2008, the aggregate amount of credit card debt outstanding began to fall. Revolving credit has dropped every month since that time and is currently about 15 percent lower than it was at the time of the Lehman Brothers Holdings bankruptcy. Although our economy has experienced other long episodes in which revolving credit growth has slowed, we have never seen such a prolonged period of outright decline.

As overall consumer spending weakened significantly over the course of the recession and the early stages of the recovery, a proportionate decline in revolving credit used to finance purchases might actually have been expected. However, the decrease in revolving credit appeared to outpace the contemporaneous decline in spending during the recession, and, so far in the recovery, revolving credit has continued to decrease even as spending has turned up. This suggests that there are factors at work other than cyclical spending weakness. Within this context, it is helpful to consider the three main reasons that net borrowing–that is, the change in credit outstanding–can decrease: First, households can charge less on their revolving accounts; second, households can pay off a larger share of their balances each month; or third, households can default on (or lenders can charge off) their existing balances.

Taking the three factors in reverse order, consider first the role of cardholder defaults. As the economy weakened in 2008 and 2009, an increasing number of households found it difficult to pay their credit card bills on time. With nearly 10 percent of the workforce unemployed and many more underemployed, a significant number of households experienced sharply reduced incomes. Weakness in the housing market also contributed to financial strains, as many households could no longer easily tap into home equity to consolidate their card debt and lower their monthly payments.¹ In this adverse economic environment, it is perhaps not surprising that the charge-off rate on credit cards more than doubled from about 4 percent in 2007 to more than 9 percent in 2009. The rate of charge-offs has since declined from its peak but remains elevated. All told, we estimate that the rise in charge-offs can account for about one-third of the net decline in revolving credit growth from 2007 to 2009.

Another possible explanation for the decline in outstanding balances might be that households, in an effort to repair their balance sheets or bring down their debt burdens, have begun paying down their credit card balances faster than usual. But, on the whole, the data do not indicate that faster paydown is a significant factor. Historically, households tend to repay their credit card balances at a faster rate during good economic times and tend to slow this rate when economic activity is weak. And, over the past several years, this tendency appears to have held up. In 2006, the rate of credit card repayment was well above its long-run trend, probably reflecting strong incomes as well as ample home equity that could be tapped to pay off more expensive card debt. However, beginning in 2007, as housing markets weakened and unemployment climbed, households began to pay off their card debt at a significantly slower pace–a trend that extended into 2008 and 2009 as the economic downturn worsened. All told, the drop in the payoff rate has been more pronounced than in the recessions of 1990-91 and 2000-01. More recently, however, this trend has reversed, and as of August 2010, the repayment rate had risen to a more typical level. While this increase likely reflects a gradual improvement in the ability of cardholders to repay their debt, it could also be attributed to a shift in the composition of cardholders in bank portfolios toward more creditworthy borrowers as charged-off accounts were replaced with new accounts underwritten using stricter criteria. The bottom line is that accelerated payment rates on existing balances do not seem to have contributed importantly to the drop in credit card debt outstanding over the past couple of years.

Finally, consumers have been charging less on their credit cards. According to industry statistics, the amount of money charged on credit cards for purchases or cash advances fell around 10 percent between the third quarter of 2008 and the first quarter of 2010. This slowdown in new charges could be the result of a variety of factors. The significant overall drop in consumption during the recession no doubt cut into the demand for credit, as households simply opted to spend less than in the past. When they did spend, they may have been less willing to borrow to fund consumption given their experiences during the financial crisis, expectations for weaker economic conditions, and continued uncertainty about job prospects. Indeed, consumer preferences toward debt do appear to have shifted. Preliminary data from the 2007-09 Panel Survey of Consumer Finances (SCF) show a modest increase–from 35 percent in 2007 to more than 40 percent in 2009–in the share of households that believed that buying things on credit was a “bad idea.” Further, those households whose views about buying on credit became more negative between 2007 and 2009 reported reducing their charges substantially more than other households. Consumers also appear to be seeking less new credit: Applications for new credit accounts, as recorded in data from the national credit bureaus, remain significantly lower than were observed for most of the past decade.

Credit supply factors have also likely contributed to the decline in overall credit card outstanding balances. Households may have charged less because they had less credit available. In the SCF panel, about 44 percent of households with credit card debt in 2007 experienced a reduction in their credit limits by 2009. Data from the national credit bureaus indicate that credit lines peaked in the third quarter of 2008 and continued to fall over the course of 2009 and 2010. The average dollar value of combined credit lines available to cardholders fell from a high near $26,000 per cardholder in late 2008 to around $21,000 per cardholder by the third quarter of 2010, a decline of about 20 percent. Moreover, SCF data indicate that changes in credit limits are indeed related to credit card spending: Among households whose credit limit declined, SCF data show that the median amount of monthly new charges fell from $200 in 2007 to $50 in 2009, while among households whose credit limit did not decline, the median amount of new charges rose from $150 to $200. Although this relationship is not necessarily causal, credit line restrictions have likely played at least some role in the reduction in credit card borrowing.

Looking further at the supply side of credit card debt, card lenders did report retrenching during the financial crisis. According to the Federal Reserve Board’s quarterly Senior Loan Officer Opinion Survey on Bank Lending Practices (SLOOS), large fractions of banks tightened standards and terms on new and existing credit card accounts throughout 2008 and 2009.² In recent months, however, some banks reported having eased standards somewhat. In the most recent survey, published in October 2010, about two-thirds of banks thought that credit standards for prime borrowers on credit card loans and other consumer loans either were at their longer-run averages or would return to them over the next two years. In contrast, for nonprime borrowers, more than half of the respondents thought that standards would remain tighter through at least 2013 or would not return to longer-run norms for the foreseeable future.

In addition to reductions in existing credit lines, new credit card account solicitations also fell considerably during the recession. By early 2009, offers to households for new credit cards had dropped to around one-fifth of their count in 2006. Card solicitations have turned up over the course of 2010, but they remain well below their pre-crisis levels. In addition, consistent with the SLOOS, the data on credit card offers show that solicitations to borrowers with lower credit scores are rebounding more slowly than those to borrowers with higher scores.

Interest rates may have caused some households to reduce their credit card usage even if unused credit lines remained available. Although credit card interest rates declined in line with broader interest rates early in the financial crisis, card rates diverged from the broader rate environment by reversing this decline during 2009. Some of the rate increase likely reflects a rise in charge-offs, which increases card issuers’ costs of providing credit. However, the divergence from rates on other forms of credit that also experienced higher charge-offs indicates that a portion of the increase may have been in anticipation of regulatory changes, which I will discuss a bit later, that will restrict some card issuers’ ability to reprice credit.

Overall, then, the available data lead me to conclude that, in large part, the decline in revolving consumer credit outstanding is due to a combination of higher charge-offs, tighter credit, and less consumer willingness to take on debt, but probably not to widespread increases in discretionary paydowns of existing debt.

Although households account for the vast majority of credit card loans and credit card spending in our economy, the market for small business credit cards has grown considerably over the past 10 to 15 years. After checking accounts, credit cards are the second-most-common financial product used by small businesses. Small business cards are structured to cater to business needs with features, pricing, and underwriting unique to their typical usage. Issuers provide several services specifically for small businesses, such as employee cards with customizable spending limits and detailed spending statements each month or quarter. Also, small business cards often have higher credit limits than personal cards to facilitate the higher spending needs of small businesses.

Small businesses are noticeably less likely than households to carry a balance on their cards. As of the end of 2009, 83 percent of small businesses used credit cards. Of those using credit cards, 64 percent used small business cards and 41 percent used personal cards. Despite the widespread use of credit cards, only a minority of small businesses–18 percent–reported borrowing on credit cards. In comparison, nearly one-half of households reported carrying a balance on their credit cards.³ Thus, although most small businesses appear to use credit cards for transactions purposes, and perhaps as a source of short-term credit, the data suggest that only a small fraction of them rely on credit cards as a source of longer-term credit. Yet even if firms do not carry a balance, reductions in the size of their credit card lines may strain their cash flow and force them to cut spending or require them to use more expensive forms of short-term credit, such as trade finance.

Tags: amount, consumer spending, consumption, course, credit card debt, decline, distressed market, drop, financial crisis, lehman brothers, lehman brothers holdings, line, Panel, peak, percent, policymakers, prolonged period, rate, revolving credit, slow rebound

New Home Sales

Sales of new one-family houses in July 2009 were at a seasonally adjusted annual rate of 433,000. This is 9.6% above the revised June 2009 estimate of 395,000.

July 2009: +9.6 % change
June 2009: +9.1 % change

Tags: family houses, rate

Housing Starts/Building Permits

Privately-owned housing starts in July 2009 were at a seasonally adjusted annual rate of 581,000. This is 1.0 percent below the revised June 2009 estimate of 587,000.

July 2009: -1.0 % change
June 2009: +6.5 % change

Tags: rate

Housing Vacancies and Homeownership

Homeownership Rate (HR)
The homeownership rate (67.4 percent) for the current quarter was lower than the rate in second quarter 2008 (68.1 percent), but not statistically different from the rate in second quarter 2009
(67.3 percent).

Rental Vacancy Rate (RVR)
The rental vacancy rate in second quarter 2009 (10.6 percent) was higher than the second quarter 2008 rate (10.0 percent).

Homeowner Vacancy Rate (HVR)
The homeowner vacancy rate in second quarter 2009 (2.5 percent) was lower than the second quarter 2008 rate (2.8 percent).

2nd Qtr 2009
(HR): 67.4 percent
2nd Qtr 2008
(HR): 68.1 percent

Tags: Homeowner, Homeownership, HVR, rate, rental vacancy rate, RVR, second quarter, Vacancy

Important Announcement From Rate Lock Advisory

As of today, we will not be providing you with the rate lock advisory commentary, which we were receiving from “Mortgage Commentary”.  After we have arranged a proper license from them we will return the content here in the mean time pleave visit them at www.mortgagecommentary.com and you can subscribe to their email list and receive it directly from the source. 

Instead we will be providing RSS News feed from various sources to provide you with the full information.

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William Braddock

Tags: lock, mean time, mortgage commentary, rate, time, today, William Braddock, www

Daily Mortgage Rate Lock Advisory for Thursday 08/06/09

Thursday’s bond market has opened relatively flat with no important economic data on the schedule for today. The stock markets are showing minor losses with the Dow down 15 points and the Nasdaq down 11 points. The bond market is currently nearly unchanged from yesterday’s close, but we will still see an increase in this morning’s mortgage rates of approximately .125 – .250 of a discount point due to weakness in bonds late yesterday.

Today’s only semi-relevant data was weekly unemployment claims from the Labor Department. They reported that 550,000 new claims for benefits were filed last week. This was much lower than the 580,000 that was expected, but since this data basically tracks only a week’s worth of claims it usually has a minimal impact on mortgage rates.

Tomorrow morning brings us the almighty monthly Employment report. This report gives us the U.S. unemployment rate, number of jobs added or lost during the month and the average hourly earnings reading for July. The ideal situation for the bond market is rising unemployment, a sizable loss of jobs and little change in earnings. This report is considered to be one of the single most important releases that we see each month, therefore, can heavily influence the markets and mortgage rates.

Current forecasts are calling for the unemployment rate to have risen 0.1% to 9.6% while approximately 328,000 jobs were lost. The unemployment rate probably will not be much of a factor unless it moved much more than the 0.1% that is expected. However, due to the importance of these readings, we will most likely see quite a bit of volatility in the markets and mortgage pricing tomorrow morning if they vary from forecasts. If the data shows stronger readings such as fewer jobs lost in the month or a lower than expected unemployment rate, expect to see mortgage rates move higher tomorrow. Weaker than expected
readings should push mortgage rates lower.

If I were considering financing/refinancing a home, I would….
Lock if my closing was taking place within 7 days…
Lock if my closing was taking place between 8 and 20 days…
Lock if my closing was taking place between 21 and 60 days…
Float if my closing was taking place over 60 days from now…

This is only my opinion of what I would do if I were financing a home. It is only an opinion and cannot be guaranteed to be in the best interest of all/any other borrowers.

Tags: average hourly earnings, bond, bond market, closing, employment report, minimal impact, minor losses, mortgage rates, rate, refinancing a home, report, stock markets, tomorrow, U.S., Unemployment, unemployment claims, unemployment rate

Daily Mortgage Rate Lock Advisory – Wednesday Apr. 22nd

Rate Lock Advisory – Wednesday Apr. 22nd

Wednesday’s bond market has opened in negative territory with no relevant economic news and early stock gains making bonds less attractive. The Dow is currently up 60 points while the Nasdaq has gained 28 points. The bond market is currently down 13/32, which should equate to an increase in this morning’s mortgage rates of approximately .250 of a discount point.

There is no relevant data scheduled for release again today, so look for any movement in bond prices and mortgage rates to come as a result of a swing in stock prices. Yesterday’s afternoon weakness in bonds was not a complete surprise and we may have more of it today. Accordingly, this may be a good time to lock a rate if closing in the immediate future.

We do have some relevant data scheduled for release tomorrow. The National Association of Realtors will post March’s Existing Homes Sales early tomorrow morning. They are expected to show a drop from February’s sales, but this data is not considered highly important. It can however, influence trading and lead to slight changes in mortgage rates if it varies greatly from forecasts.

Also tomorrow is the weekly release of unemployment figures from the Labor Department. They are expected to show that 639,000 new claims for benefits were filed last week. This would be an increase from the previous week’s total. The higher the number of claims, the better the news for bonds and mortgage rates.

If I were considering financing/refinancing a home, I would…. Lock if my closing was taking place within 7 days… Lock if my closing was taking place between 8 and 20 days… Float if my closing was taking place between 21 and 60 days… Float if my closing was taking place over 60 days from now… This is only my opinion of what I would do if I were financing a home. It is only an opinion and cannot be guaranteed to be in the best interest of all/any other borrowers.
©Mortgage Commentary 2009

Tags: association of realtors, bond, closing, existing homes sales, lock, mortgage commentary, national association of realtors, negative territory, rate, refinancing a home, Release, release tomorrow, stock gains, tomorrow, unemployment figures, Wednesday

Daily Mortgage Rate Lock Advisory – Thursday Mar. 19th

Rate Lock Advisory – Thursday Mar. 19th

Thursday’s bond market has opened in positive territory this morning as yesterday’s afternoon news has continued into this morning’s trading. The stock markets are not boding so well with the Dow down 37 points and the Nasdaq down 3 points. The bond market is currently up 7/32, which will likely keep mortgage rates near yesterday’s afternoon pricing. Overall, this morning’s rates should be approximately .625 of a discount point lower than yesterday’s morning rates. This equates to an improvement of a little more than .125 of a percent in rate.

Today’s economic data did not heavily influence trading or mortgage rates. The Labor Department gave us weekly unemployment claim figures, saying that 646,000 new claims for benefits were filed last week. This was a little lower than expected, but offsetting that number was news that the number of continuing claims reached a record number. Generally speaking, this data is not considered to be of high importance to the markets, so its impact on rates is usually limited.

The second piece of news was February’s Leading Economic Indicators (LEI). The Conference Board reported that the index fell 0.4% last month, which was stronger than the 0.6% decline that was expected. However, they also revised January’s reading weaker by 0.3%, effectively making this morning’s results a non-factor in the markets. But it does indicate that economic conditions are expected to weaken moderately over the next several months and that is favorable for bonds.

There is no relevant economic news scheduled for release tomorrow. I would not be surprised to see the bond market give back a little of this week’s gains as the markets stabilize. This could lead to a small increase in mortgage rates if true. Therefore, we may want to consider locking an interest rate if closing in the immediate future. The longer-term out look is still quite favorable for mortgage shoppers in my opinion t hough.

If I were considering financing/refinancing a home, I would…. Float if my closing was taking place within 7 days… Float if my closing was taking place between 8 and 20 days… Float if my closing was taking place between 21 and 60 days… Float if my closing was taking place over 60 days from now… This is only my opinion of what I would do if I were financing a home. It is only an opinion and cannot be guaranteed to be in the best interest of all/any other borrowers.
©Mortgage Commentary 2009

Tags: bond, bond market, closing, economic data, Float, immediate future, labor department, leading economic indicators, LEI, mortgage shoppers, rate, release tomorrow, stock markets, unemployment claim, yesterday

Daily Mortgage Rate Lock Advisory – Friday Mar. 6th

Rate Lock Advisory – Friday Mar. 6th

Friday’s bond market has opened in positive territory after this morning’s major economic news failed to hurt the recent enthusiasm in bonds. The stock markets are in negative ground, but were showing strong gains during early trading. The Dow is currently down 19 points while the Nasdaq has lost 12 points as the opening rally has fizzled. The bond market is currently up 5/32, which with yesterday’s gains should improve this morning’s mortgage rates by approximately .375 of a discount point.

The Labor Department reported this morning that the unemployment rate spiked to a 25-year high of 8.1% last month. This was higher than the 7.9% rate that was expected, which can be considered good news for bonds. The reports also revealed that 651,000 jobs were lost during the month, but that was very close to forecasts. It also revised February’s job loss higher by 57,000 jobs. The hourly earnings reading matched forecasts of a 0.2% increase.

Overall, t he unemployment rate was an attention magnet, but the other portions of the report are a non-factor in this morning’s trading and mortgage rates. The early rise then fall in stocks indicates that further weakness in them could be likely. That may benefit bonds as investors seek shelter from the volatility. However, if stocks can hold any type of a rally, the bond market could see considerable weakness, likely driving mortgage rates higher.

Next week is pretty light in terms of economic releases. There are only a couple of relevant reports scheduled to be posted, but one of them is highly important. None of the relevant news will be posted until mid-week, so look for a relative calm day for mortgage rates Monday unless the stock markets rally or sell-off again. Sunday’s weekly preview will have more details on next week’s events.

If I were considering financing/refinancing a home, I would…. Float if my closing was taking place within 7 days… Fl oat if my closing was taking place between 8 and 20 days… Float if my closing was taking place between 21 and 60 days… Float if my closing was taking place over 60 days from now… This is only my opinion of what I would do if I were financing a home. It is only an opinion and cannot be guaranteed to be in the best interest of all/any other borrowers.

Tags: bond, bond market, closing, economic releases, Float, hourly earnings, mortgage rates, rate, refinancing a home, relevant news, relevant reports, stock markets, unemployment rate