The Fed Issues A Subprime Warning As Household Debt Hits A New All Time High

After we first reported last week that US credit card debt once again rose above $1 trillion, despite a recent sharp downward revision to the data, while both student and auto loans rose to a fresh record high...

... it would probably not come as a surprise that according to the just released latest quarterly household debt and credit report by the NY Fed, Americans' debt rose to a new record high in the second quarter on the back of an increase in every form of debt: from mortgage, to auto, student and credit card debt. Aggregate household debt increased for the 13th consecutive quarter, rising by $116 billion (0.9%) to a new all time high. As of September 30, 2017, total household indebtedness was $12.96 trillion, an increase of $605 billion from a year ago and equivalent to 66% of US GDP, versus a high of around 87% in early 2009. After years of deleveraging in the wake of the 2007-09 recession, household debt has risen more than 16.2% since the trough hit in the spring of 2013.

Some more big picture trends:

Mortgage balances, the largest component of household debt, increased again during the first quarter to $8.74 trillion, an increase of $52 billion from the second quarter of 2017.  Balances on home equity lines of credit (HELOC) have been slowly declining; they dropped by $4 billion and now stand at $448 billion.  Non-housing balances, which have been increasing steadily for nearly 6 years overall, saw a $68 billion increase in the third
quarter. Auto loans grew by $23 billion and credit card balances increased by $24 billion, while student loans saw a $13 billion increase.

  • Suggestive of a modest rebound in mortgage activity, mortgage originations in Q3 were $479 billion, up from $421 billion in Q2 if still below the $491 billion as of Q1. The mMortgage delinquency rate improved to 1.38% from 1.47% prior quarter.The number of household loans increased to 671.07 million.
  • Auto loan balances increased by $23 billion, continuing their 6-year trend.  Auto loan delinquency rates increased slightly, with 4.0% of auto loan balances 90 or more days delinquent on September 30. There was a total of $150.6 billion in auto loan originations in Q3, an uptick from the $148 billion in the second quarter of 2017,  and among the highest quarterly volumes seen in the Fed's data.

  • Credit card balances increased by $24 billion. The aggregate credit card limit rose for the 19th consecutive quarter, with a 1.5% increase.
  • Outstanding student loan debt grew by $13 billion and stood at $1.357 trillion as of September 30, 2017, up from $1.344 trillion in Q2. 11.2% of aggregate student loan debt was 90+ days delinquent or in default in Q3 2017, unchanged since the previous quarter

In general, many new loans last quarter went to households with healthy credit. The median credit score for auto loans originated in the third quarter was 705, and the median credit score for new mortgage borrowers was 760, according to the WSJ.

Mortgages made up more than two-thirds of overall household debt and totaled $8.74 trillion in the third quarter, up $52 billion from the spring. Home-equity lines of credit, meanwhile, fell by $4 billion from the second quarter to $448 billion.

The table below summarizes the key changes in household debt and credit developments as of Q3 2017

On the qualtiative front, aggregate delinquency rates ticked up slightly, from 4.8% in Q2 to 4.9% in Q3.  Late-payment rates on the whole remain low, but flows into delinquency have risen in recent years for credit-card and auto debt. This was offset by foreclosures which reached a new historical low, as only 69,580 individuals had a new foreclosure notation added to their credit reports in the third quarter of 2017. Also of note, new bankruptcies fell to 208,440 from 224,020 prior quarter.

In a troubling development, and following on the warning issued last quarter, the New Your Fed explicitly warned that credit card and auto loan "flows into delinquency" increased. Specifically, credit card flows into delinquency have increased over the past year, while auto loan flows into delinquency have been steadily increasing for several years.

Also notable, auto loan originations were at $150.6 billion, up slightly from the previous quarter, marking the second highest level in more than a decade.

The New York Fed also issued a parallel report which examined the changes in the auto loan market in terms of originations and performance by lender type. And whereas last quarter the NY Fed's warning looked at deteriorating trends among credit cards and focused on the general downshift in credit quality, this quarter the Federal Reserve focused on troubling developments in the auto loan space, where "delinquency flows across several debt types climbed this quarter, including for auto loans,” according to Wilbert van der Klaauw, senior vice president at the New York Fed.

One continued concern: the sharp rise in delinquency for auto loans made to subprime borrowers by auto-finance companies, usually through auto makers or dealers.

“Examining the auto loan market more closely revealed notable differences between auto finance and auto bank lenders. Delinquency rates among auto finance lenders are considerably higher and rising, especially for subprime borrowers, in part reflecting differences in underwriting standards.”

Here are some other disturbing auto loan trends highlighted by the NY Fed:

Outstanding subprime auto debt (classified in the chart below as debt held by borrowers with origination credit scores under 620) now stands at about $300 billion. Although this amount has increased steadily in absolute terms, as a share of the total outstanding auto loan balance, it has been fairly steady at around 24 percent since about 2011. Subprime loans are disproportionately originated by auto finance companies, and their share has nearly doubled since 2011 and now stands at over $200 billion—represented in dark blue on the left panel of the chart below. In comparison, the outstanding balances of bank auto loans remain dominated by loans originated to borrowers with higher credit scores, as shown in the right panel below.

Since 2011, the overall delinquency rate of loans originated by auto finance companies has significantly deteriorated. The Fed found that while the 90+ day delinquency rate for bank auto loans has been steadily improving since the financial crisis, in contrast, the delinquency rate for auto finance companies has been sharply increasing since 2014, by more than 2 percentage points.

Further disaggregating the delinquency rates by the origination credit score of the borrower shows that while the delinquency rates for borrowers with credit scores of 660 or higher appear to be somewhat steady, the subprime delinquency rates are really where the pressure is. This is especially stark when the Fed breaks out auto finance and bank loans, which shows that the delinquency rate – even among borrowers in the same credit score bucket – is considerably higher and rising on the auto finance side. This suggests that bank auto loans may have some additional layers of underwriting – credit score alone does not explain the gap and divergence in the delinquency rates. Meanwhile, the overall delinquency rate for auto loans shows only a very slow increase masking the sharp rise in subprime delinquency, which is diluted by the increase in prime loans with better performance.

Putting these numbers in context, while the impact from these growing delinquencies on the larger financial sector may be muted, the Fed cautions that there are over 23 million consumers who hold subprime auto loans. These consumers may find their credit reports further damaged after a default or encounter further financial difficulties after experiencing a car repossession.

At this point it is worth recalling the explicit warning the NY Fed made three months ago on deteriorating trends in an other key debt product: credit cards.

“While relatively low, credit card delinquency flows climbed notably over the past year,” said Andrew Haughwout, senior vice president at the New York Fed. “This is occurring within the context of loosening lending standards, as borrowers with lower credit scores recover their ability to access credit cards. The current state of credit card delinquency flows can be an early indicator of future trends and we will closely monitor the degree to which this uptick is predictive of further consumer distress.

That bolded statement, was the first official warning by the Fed that the US consumer is sick, and the Fed has no way reasonable explanation for this troubling jump in delinquencies. As we said at the time, "timestamp it, because this will certainly not the be the last time the Fed warns about the dangerous consequences of all-time high credit card debt."

And now, in addition to credit cards we can also add auto loans to the growing list of things the Fed is becoming increasingly worried about, as well as including the universe of up to 23 million Americans who are facing an imminent default, and whose credit-funded purchasing power will soon be sharply curtailed.


Al Huxley Tue, 11/14/2017 - 12:50 Permalink

Don't encourage them by publishing their nonsense!   Look, if you just ignore the FED instead of hanging on their every word they'll eventually give up and go away.  They only publish this junk because it gets them attention.

Money Honey Tue, 11/14/2017 - 12:51 Permalink

Gold Investment Demand will Boom as Bearish Realities of Bubble-Valued Stock Markets Hit… nearly everything else in the global markets, gold prices are heavily dependent on investment capital flows. Mesmerized by the extreme stock-market euphoria, investors feel no need to diversify their portfolios with counter-moving gold. Gold investment demand will return as the hard bearish realities of bubble-valued stock markets & central-bank tightening shatter today’s hyper-complacency. Extreme Equity Market Overvaluation – The Greatest Sell Signal In Stock Market History… 

ParkAveFlasher Tue, 11/14/2017 - 12:59 Permalink

Credit isn't money, and debt isn't wealth.In the demonic post-modernity of double-entry accounting, your debt is someone else's asset.  Guess who that someone is?Your debt is someone else's asset, thus the cheapness and ready-availability of debt. This is how entire generations are enslaved: willingly.Hell is constantly sending me offers.This is why REDEMPTION is important.

Soul Glow Tue, 11/14/2017 - 12:57 Permalink

Debt is the instrument of financial gain in todays economy.  Long gone is the dividend as the reason to purchase stock.  Here is the debt laden buy-back economy.  Go into debt for gains today, who cares about tomorrow.  GE is evidence to this, as their dividend incentive has caused investors to flee.  Investors want bang for their buck today, never mind what the company will do for them down the road.

semperfi Tue, 11/14/2017 - 12:57 Permalink

I don't see a problem here.  Defaults happen.  Bank bailouts happen via more printed funny money - banks win.  Defaulting borrowers pay higher interest next time due to fucked credit rating - banks win more.  Rinse-repeat.  Banks keep winning.  Treasury interest payment keeps going up - just print more funny money to pay the interest.   So where's the problem again ?

khnum semperfi Tue, 11/14/2017 - 13:06 Permalink

Im no defender of banks but most parties entering a financial contract are told their obligations and there is mortgage,unemployment and accident insurance to cover your most important asset -yourself -.The complications you suggest often aren't the financial institutions problem there are however some bad eggs out there that will give a credit card to someone on food stamps the problems occur when good lending gives way to sales targets.

In reply to by semperfi

Herdee Tue, 11/14/2017 - 13:26 Permalink

Just print it, the ponzi needs to buy debt and print fiat paper exponentially to stay afloat. The federal government deficits are ballooning right now, it's out ofcontrol, that's the biggy in the room.

Waz88 Tue, 11/14/2017 - 14:34 Permalink

oooooh well..all this do not come as a sorprise, as we are human and CANNOT learn from our prior mistakes, at end of the day if things go sideways we can blame it on immigrants,media,wars ecc ecc 

JibjeResearch Tue, 11/14/2017 - 15:58 Permalink

I'll share my way of being better financially.1.  I have a mortgage.  Every week, I get mail offer to refinance and take money out and not have to pay for 2 two to 4 payments.  Fuck these AssClowns trying to put me into more debt.  I will not file bankruptcy because that is just like starting over with a new mortgage or go straight to renting...2. I will take advantage of the Fed CTRL+P by just having a stable job.  Spend less every month and put the saving into the "right" stock or crypto.  Get the profit and pay off the mortgage.  This is the best things because debt is constant while investment is not.  If I do it right, I'll pay off the mortgage.3. I take risk in stock, crypto, and property.  When the bills are paid, all money goes into investment.My plan is not perfect, but at least it gives me a chance...I hope I was able to help show you a perspective on how to get ahead...Best Wishes... 

Woodrox Tue, 11/14/2017 - 17:20 Permalink

broad stroke reasoning.....8trillion is backed by collateral and or 1st dollar earned income.........all the rest, 4trillion is marginal last dollar earned or no dollar earned and could easily go poof! , ie, student loans are backed by a promise by people who earn little or nothing, car loans are backed by over priced and depreciating (dare i say assets), credit cards.... 20 % rates or higher, balances doubling every 3.6 (rule 72)years, and HELOC- backed by underwater houses and declining or not rising incomes for over indebted individuals

Let it Go Tue, 11/14/2017 - 18:58 Permalink

If employers let a few people go and unemployment rises just watch what unfolds, massive defaults.It is only prudent that we again come back and address the issue of where bad debt goes because when debt is written off there are always winners and losers. Efforts to call agreements to forgive debt a win-win are nothing more than putting lipstick on a pig.Fear is on the rise when it comes to growing debt and how much of it will never be repaid. When the economy heads south it will become obvious that not all debt is created equal and you do not want to be caught on the wrong end of a debt gone bad. The article below looks at the issue of defaults.

William Dorritt Tue, 11/14/2017 - 23:22 Permalink

The median family pays 62% in taxes.The Govt at all levels borrows the other 38%The median family is now one pay check away from financial ruin.Knock downs are the solution.Save the family