Federal Reserve Chairman Alan Greenspan on Monday said U.S. consumers seemed in generally good financial shape, able to carry more debt comfortably because they are cushioned by rising home prices. Homeowners have done well, keeping their total debt burden under control. It has been easier to do, because mortgage rates have been at historically low levels and there has been "an enormous wave" of refinancing to take advantage of cheaper rates, he said. "Overall, the household sector seems to be in good shape," Greenspan told the Credit Union National Association. "Much of the apparent increase in the household sector's debt ratios over the past decade reflects factors that do not suggest increasing household financial stress." While bankruptcy rates have risen to "an unusually high level" in recent years, which was troubling because it showed the impact of economic slowdown, it could not be taken as reliable gauge of the household sector's health since it does not forecast the future.
KEEPING PAYMENTS UP
A better gauge was payment delinquency rates. "The recent experience with some delinquency rates has been encouraging, with rates falling for several measures of credit card and automobile debt," Greenspan said. He said both the debt service ratio and financial obligations ration -- which measure how much of a household's income must go to carrying debt -- had risen modestly during the 1990s but during the past two years "have been essentially flat." Greenspan noted that debt-to-income ratios have been rising for half a century and the ratio of net worth to income was currently higher than its long-run average because household assets were rising as well. That was not worrying because more alternatives were available for managing debt. "So long as financial intermediation continues to expand, both household debt and assets are likely to rise faster than income," he said, but that did not necessarily imply a heavier debt burden.
PUT IT ON THE CARD
While credit-card debt has risen, that was not necessarily an indicator of financial weakness, but instead a reflection of increased home ownership and more widespread use of credit cards as a method of payment, Greenspan said. One area where Greenspan suggested consumers might save money, and industry offer more innovation, was in considering alternatives to fixed-rate mortgages. U.S. homeowners were much more likely than consumers in other countries to prefer fixed-rates mortgages to adjustable-rate ones. "American consumers might benefit if lenders provided greater mortgage product alternatives," Greenspan said. He noted the traditional fixed-rate mortgage "may be an expensive method of financing a home" that may have cost tens of thousands of dollars extra in interest costs for many Americans over the past decade of declining interest rates.///