This chart below, courtesy of The Economist, raises a puzzling question as much as it depicts a worrisome trend (though it does that too):
The Economist writes that bankruptcy filings in the US climbed by 20 per cent in the year through the end of June, compared with the prior 12-month period.
Yet despite the financial crisis and ensuing recession, filings are still only at the same level as before 2005, the year in which the looming threat of more stringent laws motivated waves of people to pre-emptively declare insolvency.
CreditSights explains the situation this way:
One of the inscrutable mysteries of the financial crisis of 2007-??, which is after all a housing and consumer debt crisis, has been how few bankruptcies have been filed. Somehow, historically unprecedented levels of consumer debt and loan defaults have not produced the surge in bankruptcy filings one would expect.
And the details cited by CreditSights are gory indeed (emphasis ours):
Debt defaults for consumers and homeowners are now running at two to five times their pre-crisis levels. Each quarter for the past two years, the Mortgage Bankers Association has announced new all-time highs for mortgage default or foreclosure rates. Through previous business cycles the combined rate of foreclosures and 90-day delinquencies has rarely exceeded 2% of all mortgages; it now stands at 9.7%, and will probably exceed 10% in the second quarter numbers due out this week. Credit card charge-off rates for banks have been hovering around 10%, compared to their usual 3% to 5% range in the recent past. So debt, and debt defaults, are much, much higher than they have been at any time since the 1978 Bankruptcy Code. But filings are not.
The post also highlights the wide discrepancy between the number of mortgage borrowers in distress and the number of Chapter 13 filings, which are the bankruptcy filings made when borrowers want to try to reorganize their payments in an effort to save their homes.
Currently, Chapter 13 filings makes up a smaller share of total bankruptcies than they have in previous years, as CreditSights explained in a prior post. Why might this be happening? CreditSights again:
Homeowners in 2008 and 2009 seem to have realized three things: 1) home prices are not going up anytime soon; the “crisis” is a long-term change in the housing and mortgage markets; 2) they are not going to get a loan modification; the Administration’s projected numbers of those who would be helped by HAMP and HARP were fanciful (dare I say “misleading”?); and 3) they simply cannot make their mortgage payments in a world where overtime is being eliminated, unemployment is a fear or reality, increased tax burdens loom as states and localities can’t make ends meet, and many other costs remain high (gas, health care, etc.) Many people had these realizations in 2008, and many more had them in 2009. Each year, the share of chapter 13 filings plummeted.
If this is right, then borrowers aren’t trying to save their homes because they essentially have no hope of doing so even under modified terms. Faaaantastic.
Relatedly, a new quarterly report from the New York Fed contains mixed news with respect to bankruptcies. On the one hand, households are deleveraging, as you can see from this chart that EconomPic Data constructed from the report:
The NY Fed notes that this is the first time since early 2006 that “the share of total household debt in some stage of delinquency declined, from 11.9 percent to 11.2 percent.”
On the other hand, the report also finds this:
However, the number of people with a new bankruptcy noted on their credit reports rose 34 percent during the second quarter, considerably higher than the 20 percent increase typical of the second quarter in recent years.
With that kind of momentum, the number of bankruptcies may keep climbing for some time yet.
Related links:
Bankruptcy and the crisis: why so few? – Credit Sights
Going for broke – The Economist
HAMP: it’s worse than we thought – FT Alphaville