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Mortgage Balance Delinqeuncy on the Rise

During the third quarter of this year, 2.7 percent of current mortgage balances transitioned into delinquency, according to new data from the Federal Reserve Bank of New York. That’s up from 2.6 percent that became newly delinquent in the second quarter.

Fed officials called the quarterly increase “slight” but noted that the rise follows a full year of declines in new delinquencies.

The New York Fed said it observed a similar pattern in the third quarter of 2009, which might suggest this is simply a seasonal effect, but the federal bank says it plans to “closely monitor” the development.

According to the New York Fed’s report, about 457,000 individuals received home foreclosure notices on their credit reports between July 1 and September 30, 2010. Officials say this represents a 5.5 percent decrease from the second quarter and a 6.4 percent drop from a year earlier.

The Fed says consumers are continuing to trim their debt. It’s a trend that has been evident for the previous seven quarters, though the pace of decline has slowed recently. Since peaking in the third quarter of 2008, nearly $1 trillion has been shaved from outstanding consumer debts, the federal bank reports.

Excluding the effects of defaults and charge-offs, available data show that non-mortgage debt fell for the first time since at least 2000. Also, net mortgage debt paydowns, which began in 2008, reached nearly $140 billion by year-end 2009.

The Fed says “these unique findings suggest that consumers have been actively reducing their debts, and not just by defaulting.”

“Consumer debt is declining but only part of the reduction is attributable to defaults and charge-offs,” said Donghoon Lee, senior economist in the Research and Statistics Group at the New York Fed. “Americans are borrowing less and paying off more debt than in the recent past. This change, which we continue to study carefully, can be a result of both tightening credit standards and voluntary changes in saving behavior.”

The fact that consumers are reducing their debt with payments rather than non-payments would seem to be a good thing. But analysts say because outstanding debt balances are shrinking, it signals consumers aren’t spending – a bad sign for an economy to struggling to gain its footing.

With this report, for the first time, the New York Fed addressed the question of how the decline in overall consumer debt has been achieved. They correlated it to a “sharp reversal” in household cash flow from debt, indicating a decrease in available funds for consumption.

According to newly available data through year-end 2009, the payoff of debt by consumers reduced their cash flow by about $150 billion, whereas between 2000 and 2007, borrowing had contributed more than $300 billion annually to consumers’ cash flow, the Fed explained in its report.