Mind the gap, rising delinquency rates suggest that US households with lower than average credit scores are finding it challenging to keep up with consumer loan payments.
Sub-prime consumer delinquency rates are blowing out, according to the latest Fed’s Q3 data.
A sub-prime loan is typically a high risk-loan offered to people who do not qualify for a conventional loan, either because of low income, a high loan-to-value ratio, or poor credit history with a credit score below 620.
Credit card loans are flashing rising delinquency rates
A recent Fed survey showed subprime delinquencies in credit card loans reaching 6.25% in the third quarter of 2019, which is higher than even during the peak of the 2008 financial crisis.
The Fed’s comprehensive data were collected from approximately 5,000 small and/or commercial banks in the US and its findings are the latest to indicate trouble looming in subprime credit card loans.
Rising delinquency rates in subprime credit card loans have been following a steep upward trajectory, particularly over the last few years
Delinquency rates in credit card loans, car loans are blowing out and that is no exaggeration.
Just three years ago in 2016 credit card delinquency rate at these small and/ or commercial banks was in the 3% range. But fast forward to today, 2019 and twice as many households with a lower than average credit score have fallen into the delinquent credit card loan basket.
Banks define a credit card balance as becoming delinquent when payment on the account is 30 days past the due date.
In other words, 6.25% of credit card loans are 30 days past due payment
Moreover, despite balances being removed from the delinquency basket, the rising delinquency rate continues unabated.
Balances are deducted from the delinquency basket when either the customer catches up with late payments, or when the bank charges the delinquent balance against its loan loss reserves.
So more delinquencies are flowing into the delinquency basket compared with those being deducted from the basket, which has led to net rising delinquency rates.
Another segment of consumer loans showing signs of distress is subprime auto loans, which are also experiencing rising delinquency rates
It has been dubbed as the subprime auto loans blow up with auto loan delinquencies at a record.
Serious auto loan delinquencies have surged past the Great Recession rate. Serious Auto loan delinquencies are defined as auto loans which have become 90 days past their due payment date.
The latest Q3 serious delinquency rate of 1.3 trillion US dollars of auto loans has surged to 4.71%, is the highest since the dismal months of the financial crisis when the auto industry collapsed.
But the business climate during the depth of the Great Recession of 2008 is different from today. Back then the US unemployment rate was at its highest since the Great Depression and the big three auto CEOs flew their private jets to Washington begging congress for a bailout.
Today, the US unemployment rate is at a 50 year low at 3.7 percent, as payrolls rise by 136,000
Health care added 39,000 new jobs, while professional and business services increased by 34,000. Government jobs continued to rise, increasing by 22,000 So the job market is strong.
Job layoffs are not hitting the headlines as they did during the Great Recession, yet rising delinquency rates are an indication that households with low credit scores are struggling to keep up with consumer loan payments.
If employment is at an all-time high, why are also rising delinquency rates at or near Great Recession levels?
Here are some factors to consider why rising delinquency rates are being reported in what appears to be a strong economy, albeit with a few cracks.
The first factor to consider is that high-risk lending is lucrative for banks and financial institutions.
High-risk lending means that the lender can charge the borrower greater interest on the debt to compensate for the potential risk of loan default. So the banks are incentivized to take big risks for big rewards. Concerning credit card lending, these loans are unsecured, unlike mortgages and auto loans. Moreover, auto loans are plentifully and granted to anyone with a heartbeat.
So greed, combined with the Fed’s monetary easing policy could be aiding and abetting the proliferation of risky lending and thereby rising delinquency rates
Rising delinquency rates today are not being triggered by 10 million people losing their jobs as they did during the Great Recession.
People are employed, according to the official data, but they are falling behind in consumer loan payments.
So this suggests that stagnant wages and rising costs could be creating conditions for late consumer loan payments and rising delinquency rates
Despite the good employment numbers the missing piece of the jigsaw puzzle continues to be no rise in real wages. Those aged 25 to 29 have seen real wage falls of the order of 12%; for those aged 18 to 24, there have been falls of over 15% (Gregg et al, 2014).
Meanwhile, the price of non-discretionary items, necessities keep going up. There is inflation in necessities and for millennial’s, real wages are going down.
Used cars, health insurance, housing costs have all soared above the actual CPI Index.
So when households live paycheck to paycheck one emergency expense can cause late loan repayments and defaults. Almost 40% of American adults wouldn’t be able to cover a $400 emergency with cash, savings or a credit card charge that they could quickly pay off, according to a Fed survey.
Could the gig economy be creating a scarcity of creditworthy borrowers and rising delinquency rates too?
The rise of temporary jobs or people doing odd jobs has increased in the last decade, particularly among the young workforce.
This category of borrowers would be considered high risk due to their lack of job security.
So despite the greatest economy ever, corporates are in an earning recession and delinquency rates are at levels not seen since the last Great Recession.