Bloomberg reports that the US Consumer is in the best financial state since 2006 as the average FICO Credit Score rose to 696 in May.
“The ratio of consumer-debt payments to incomes is the lowest since 1994, and delinquencies have dropped 30 percent in two years, Federal Reserve data show.Improving credit quality gives households the ability to lift borrowing as concerns ease about rising gasoline prices, hard-to-find jobs and falling home prices.”
Is the U.S. consumer truly more creditworthy than in the past? The official credit scores and the consensus of the economists would make you believe that. AdvisorLeap doesn’t believe that the U.S. consumer is truly more creditworthy than in the past. The U.S. consumer benefits from the tremendous market interference by both the U.S. Government and the quasi-private Federal Reserve System.
Millions of homeowners in the United States are not paying a mortgage and live mortgage free while also not having to pay rent. This is a direct result of the changes in accounting regulations in March of 2009 as AdvisorLeap reported so many times in the past. By marking the assets and liabilities up to bubble value instead of market value, banks have the means and legal ability to cook their books. This is nothing short of Enron style accounting.
Not foreclosing allows the banks to keep their non-performing assets and liabilities on their books at artificially inflated book values. No, it doesn’t make business sense but it makes accounting sense as not foreclosing allows the banks to not realize those losses. This accounting gimmick is at the root of this “economic recovery” since Spring of 2009. Consumers are artificially rich again not because of home equity lines of credit as in the past, but because many no longer have the monthly expense of maintaining their home debt.
By not paying their mortgage, homeowners have the ability to pay their car loans and maintain their credit card debt. This creates an environment in which the U.S. consumer appears to be in better credit standing. It’s this artificial credit environment that is at the root of improved consumer credit scores.
Not surprisingly, many economists believe that the American consumer has fundamentally improved their credit scores. The same economists who now believe that the American consumer is more credit worthy wrongfully believed during the housing bubble that the Ameircan consumer was in great credit standing. Then as now, Americans only have the ability to maintain their credit standing as long as outside artificial variables allow them to do so. During the housing bubble it was rising home values that allowed Americans to tap into their home equity in order to maintain their lavish lifestyles and credit scores while five years later it is the bailouts and home debt forgiveness that allows them to maintain their credit cards and auto loans.
Fundamentally nothing has improved. Only a fool would believe that the U.S. Consumer is fundamentally more credit worthy than in 2006.
