Declines in household debt are due more to defaults than to consumers paying off the balance, reports a new study from the Brookings Institution. The analysis examines the New York Federal Reserve’s recently released data on household debt and finds that the states that reported largest declines in per capita household debt were also the states that had the highest percentages of loan defaults and foreclosure filings.
Karen Dynan, vice president and co-director of economic studies, who authored the study found that another reason household debt declined is because fewer households were able to get loans. The restrictive credit conditions, which have eased only slightly from the darkest days of the Great Recession, mean that many people are unable to finance the purchases of homes, automobiles, and other expensive items.
The inability to get credit, and the continuing softness of the housing market, means that many households are unable to refinance their mortgages into loans with lower interest rates. Dynan writes that as many one-fifth of all homeowners owe more than house is worth and, despite recent changes in federal law, very few banks are willing to refinance underwater mortgages.