Consumer Debt Challenge Looms Before Servicers.

While consumers typically prioritize home loan payments over other types of consumer debt, lenders and industry observers are becoming increasingly concerned about the growing debt burden faced by many households.

U.S. consumer debt, mostly mortgage, credit card and auto loans, grew by 10% in 2001 and 2002, according to researchers at UBS Warburg who label that growth rate "unsustainable." Personal income only grew at about half that pace, they said in a recent report. And the analysts do not expect the mortgage industry to be immune from problems associated with a "credit bubble" if debt burdens rise too high.

To some extent, the payment burden for consumers has been offset by lower interest rates.

"The best-case scenario is that consumer credit slows quickly toward a sustainable 5%-7% growth rate. The worst- case scenario is that it continues at or near its current growth rate through 2003 and into 2004. We would then assume consumer credit quality would deteriorate materially," analyst Gary Gordon and his colleagues said in their report.

For the consumer debt burden to remain flat, consumer loan growth would have to be cut in half, to 5%, according to the report.

Most of the risk associated with growing consumer debt falls outside of the home loan sector, but the analysts do see risks for the mortgage sector.

"Our consumer credit outlook is not positive for mortgage finance fundamentals. We expect a slowdown in mortgage debt growth to "as low as 5%" in 2004-2006 from 12% in 2002," UBS Warburg said. In ...