Puerto Rico’s Other Debt Problem

Puerto Rico has another debt problem — beyond the $70 billion the island owes bondholders. Even as other parts of the U.S. have bounced back from the recession, the commonwealth is still recording “stubbornly high” mortgage delinquency rates and anemic rates of household borrowing, according to a blog post this month by the New York Fed.

The findings mark the Fed’s first analysis of household debt and credit in Puerto Rico separate from the country as a whole. They come from the New York Fed’s Consumer Credit Panel, which is based on anonymized credit data from Equifax.

In 2010, 8% of Puerto Rico mortgages were 90 or more days past due — about the same percentage as in the U.S. as a whole, the Fed analysts wrote. But while U.S. mortgage delinquency rates have fallen back to 2%, Puerto Rico’s remain stubbornly at 7%. About 20% of Puerto Rico mortgages are subprime, compared to 8% for the U.S. as a whole.

As U.S. households are approaching prerecession spending levels, Puerto Rican households are still running on tight budgets, the analysts found. Household debt for the nation as a whole has bounced back to within three percentage points of its 2008 peak but Puerto Rico’s household debt is still 12 percentage points below that threshold.

Puerto Rico’s commercial banks have also pulled back both their commercial and consumer lending, or at least what they’re holding on their books, according to analysts’ review of Puerto Rico banking sector data. The outstanding balances on commercial loans held by Puerto Rico’s commercial banks has shrunk to about $15 billion from about $35 billion in 2006, the analysts found. Four commercial banks have failed and subsequently been acquired since the beginning of 2010.

A sustained lack of economic growth could make it significantly more difficult for Puerto Rico to dig itself out from underneath its mountain of bond debt. Federal legislation enacted in June creates a framework for the commonwealth to restructure its obligations.

Charged with balancing the needs of the island with its obligations to creditors is a newly created federal oversight board expected to be appointed in the coming weeks. A separate Congressional Task Force on Economic Growth in Puerto Rico, also created under the new law and chaired by Sen. Orrin Hatch, is charged with publishing its recommendations by the end of the year.

By  HEATHER GILLERS

Households on the island still recovering from recession

Puerto Rico’s Other Debt Problem