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68 THE DEBT DILEMMA I N D U S T R Y I N S I G H T / R I C H A R D F R A N K S In February 2017, the financial media sounded the alarm that total U.S. consumer debt was at $12.6 trillion, just a hair short of the $12.7 trillion peak observed on the way into the Great Recession. Clearly, posited the media, ap- proaching debt levels previously achieved only through capricious underwriting of Alt-A Option-ARMs was a sign that our industry had not learned its lesson from the last economic cycle. Over the following year, consumer debt continued its march forward, posting three con- secutive all-time highs, and ending the fourth quarter over $13 trillion, for the first time. Each time the New York Fed updated the "Household Debt and Credit Report," it triggered a flurry of headlines containing apocalyptic warnings and judgments on the irresponsibleness of the financial industry. As we digest the data from the fourth quar- ter of 2017, it is worth considering one of the main reasons these numbers keep growing: in a country with a growing economy and a growing population, nominal financial and economic indicators tend to increase over time. To ac- count for that, we need to consider two factors between the prior peak in the third quarter of 2008 and the fourth quarter of 2017: Although inflation has been low for the last decade, the value of a dollar (and thus of con- sumer debt) has decreased by about 11 percent since the most-recent peak in consumer debt levels. Over the last decade, the population of the United States has increased about seven percent, which means an additional 22 million people hold this debt. Accounting for these factors, per-capita, inflation-adjusted debt levels have decreased by 14 percent during the last decade. At the individual asset class level, two separate stories emerge, with mortgage and card appearing rela- tively healthy by historical standards, and some warning signs appearing in auto and student lending. RELATIVELY HEALTHY SEGMENTS Real per-capita mortgage debt has decreased 21 percent over the last decade. Over the same period, home equity revolving debt decreased 47 percent. Average mortgage rates decreased over 200 basis points during this period, which, combined with lower overall real per-capita debt levels, has lowered mortgage payments as a percentage of per-capita income by 36 percent, a substantial change in monthly debt burden in the asset class that represents two-thirds of total outstanding consumer debt. Combined with historically low-interest rates, low delinquency rates, and a relatively stable hous- ing market, there is little immediate cause for concern regarding these numbers. However, as interest rates begin their long-anticipated return to historically normal levels, and, given the effective reduction in the tax deductibility of mort- gage interest beginning in 2018, the cost to the consumer of mortgage payments will begin to increase, driving up the cost of new and non-fixed- rate mortgages. Whether some of this increase in debt burden is absorbed through moderation in home price apprecia-

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