Household debt decreased in 2010 due in part to default

Outstanding mortgage debt continued to contract over 2010 reflecting a decreased appetite for homeownership, according to economic researchers at the Federal Reserve Bank of Cleveland. Mortgage debt outstanding in the fourth quarter was down 2.5% from the same period a year ago. Other forms of household debt also decreased due in part to people defaulting on their monetary obligations, the Cleveland Fed said in a report authored by O. Emre Ergungor and Beth Mowry. Revolving debt, such as credit card debts, dropped 9.8% year-over-year, while nonrevovling debt, including student and auto loans, decreased 0.9%. Analysts at Bank or America Merrill Lynch previously attested that the most likely way households greatly deleverage debt is through default on an underwater mortgage. According to their estimates, Americans deleverage roughly $1 trillion in outstanding debt this way. Lender Processing Services reported that in November 2.2 million mortgage loans were 90 or more days delinquent. Households defaulting on their obligations led to an increase in bankruptcy filings. The Fed reported that in 2005 filings spiked to nearly 700,000; however, after the government passed the Bankruptcy Abuse Prevention and Consumer Protection Act later that year, filings dropped almost seven-fold to 100,000 the next year. “Since that initial post-reform setback, bankruptcies have risen more rapidly than ever,” the Cleveland Fed wrote in a recent report. In 2010, there were approximately 400,000 bankruptcy filings. The Cleveland Fed said the personal savings rate is 5.3%, down from its peak of more than 6% in June. However, the all-time low was set in April 2005 at 0.8%. The personal savings rate is often associated with money in the bank, but the Fed says the number refers to people paying down their debts. The National Association of Home Builders and MetLife recently conducted a study that found older homeowners have to tap into their savings for down payments on new homes. The Federal Reserve Bank reported in December household debt decreased 1.75% in the third quarter of 2010. Write to Christine Ricciardi. Follow her on Twitter @HWnewbieCR.