Rising Secondary Mortgage Debt

To an increasing extent, data provided by the Federal Reserve on the growth of consumer credit understate the increase in consumers' reliance on credit to finance their assets and expenditures. This is not the fault of the Federal Reserve's statisticians. Consumer credit is reported separately from their mortgage credit. Between the end of January 2000 and January 2001, consumer credit rose by 9.9 percent (not seasonally adjusted). But, consumers have been pledging their homes to replace or add to their outstanding obligations. Over the same period, consumers increased their revolving home equity loans by 24.5 percent. Since the dollar amounts involved in home equity lines are considerably less than consumer credit outstanding, the increase in home equity lines was only $25.3 billion vs. $141.1 billion of consumer credit. The shift in borrowing patterns has been fostered by the lower rates typically charged on home equity loans and the fact that the interest cost is often tax-deductible. These advantages have certainly been emphasized in television advertisements. In addition, many borrowers who are maxed out on their credit cards have been refinancing their home mortgages to lower their interest rate and convert the interest cost to a tax-deductible expense.