Banks say consumers catching up on debt payments

After years of living beyond their means, U.S. consumers hit a hard wall of reality in the last 2-and-one-half years. Hurt by massive job cuts and a free fall in home prices, many stopped paying their credit card bills and defaulted on their mortgages.
ow, while consumers may not be rushing out to go shopping yet, there are signs that they are making more of an effort to catch up with their debt payments. Recent third-quarter results from banks that write a majority of the USA's loans show fewer consumers have been late on their credit card and mortgage payments.


Bank of America saw a $146 million drop in home equity loans where customers were late in payments by more than 90 days in the third quarter. "(It's) the first decrease since the start of this credit cycle," says Chief Financial Officer Joe Price. Similarly, at Wells Fargo, the loss rate on its credit card portfolio fell to 10.9 percent from 11.6 percent of loans.

The number of people filing for jobless claims has dwindled in recent months, and signs of housing prices stabilizing are likely giving consumers some hope, analysts say. However, Sara Johnson, an economist at IHS Global Insight, doesn't expect things to get better until 2010, when she predicts the unemployment rate will peak at over 10 percent, vs. 9.8 percent now.

Still, she admits there are favorable signs. "We're at an inflection point - delinquencies are a measure of households' financial stress and perhaps the worst is over," Johnson says.

All the banks continued to record large loan losses and have set aside billions of dollars for more unpaid bills in the months ahead. But executives take comfort in the fact that those numbers are starting to level off.

"There seems to be stability in the environment in terms of consumer spending ... that could be forming the base of a recovery," says Jamie Dimon, CEO of JPMorgan Chase, where loan payments late by more than 90 days in the third quarter were down to 2.8 percent, compared with 3.3 percent of total loans in the second quarter.

Brian Foley, an analyst at Goldman Sachs, says that a slowing in the unemployment rate holds the key to stabilization. "As new jobless claims start to slow, there will be fewer people with payment issues," he says.

The stock market's run-up since March also is helping lift spirits, especially some of the more affluent consumers, who could be the first to open their wallets.

American Express, a barometer of higher-end household spending, saw a drop in its 30-day delinquency rate to 4.1 percent from 4.4 percent. "The trends in card member spending are encouraging, and there are signs that the recession may be approaching an end," CEO Kenneth Chenault says.