Federal Reserve Sees Little Sign of Rising Household Financial Stress

By Sarah Borchersen-Keto, CCH Washington Staff Writer

The debt burden of the household sector appears to be in good shape, Federal Reserve Board Chairman Alan Greenspan said February 23, 2004, noting that much of the apparent increase in debt ratios over the past decade reflects factors that do not suggest increasing household financial stress.

Greenspan told the Credit Union National Association that the rise in homeowners' debt service burdens over the 1990s, although small, is associated with increases in their nonmortgage debt and rising levels of credit card debt.

"There are several reasons that homeowners might carry more credit card debt than they did a decade ago, but these reasons generally do not indicate financial weakness among homeowning households," Greenspan said. He noted that delinquency rates on credit card payments have been falling during the past year, despite households' relatively larger holding of credit card debt.

One possible reason for the increase in credit card debt is rising U.S. homeownership rates, Greenspan suggested, along with the use of credit cards for a variety of new purposes.

"In sum, credit card debt service ratios have risen to some extent because households prefer credit cards as a method of payment," according to Greenspan.

Greenspan also said that despite annual mortgage debt growth that exceeded 12 percent a year over the past two years, the financial obligations of homeowners have stayed about constant because mortgage rates have remained at historically low levels. The homeowners' financial obligations ratio has also remained relatively constant despite the rapid growth in mortgage debt, partly due to an enormous wave of refinancing of existing mortgages.

Refinancing has allowed homeowners to take advantage of lower rates to reduce their monthly payments and to extract some of the built-up equity in their homes, Greenspan said. He noted that the surge in mortgage refinancing probably improved rather than worsened the financial condition of the average homeowner. Some of the equity extracted through mortgage refinancing was used to pay down more expensive, non-tax-deductible consumer debt or used to make purchases that would otherwise have been financed by more expensive and less tax-favored credit, Greenspan said.

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Posted February 25, 2004.