But there is no Financial Crisis. These are the boom times.
Given Americans’ ceaseless urge to borrow and spend, household debt in the third quarter surged by $610 billion, or 5%, from the third quarter last year, to a new record of $13 trillion, according to the New York Fed. If the word “surged” appears a lot, it’s because that’s the kind of debt environment we now have:
- Mortgage debt surged 4.2% year-over-year, to $9.19 trillion, still shy of the all-time record of $10 trillion in 2008 before it all collapsed.
- Student loans surged by 6.25% year-over-year to a record of $1.36 trillion.
- Credit card debt surged 8% to $810 billion.
- “Other” surged 5.4% to $390 billion.
- And auto loans surged 6.1% to a record $1.21 trillion.
And given how the US economy depends on consumer borrowing for life support, that’s all good.
However, there are some big ugly flies in that ointment: Delinquencies – not everywhere, but in credit cards, and particularly in subprime auto loans, where serious delinquencies have reached Lehman Moment proportions.
Of the $1.2 trillion in auto loans outstanding, $282 billion (24%) were granted to borrowers with a subprime credit score (below 620).
Of all auto loans outstanding, 2.4% were 90+ days (“seriously”) delinquent, up from 2.3% in the prior quarter. But delinquencies are concentrated in the subprime segment – that $282 billion – and all hell is breaking lose there.
Subprime auto lending has attracted specialty lenders, such as Santander Consumer USA. They feel they can handle the risks, and they off-loaded some of the risks to investors via subprime auto-loan-backed securities. They want to cash in on the fat profits often obtained in subprime lending via extraordinarily high interest rates.
Subprime borrowers are perceived as sitting ducks. They’ve been turned down, and they’re aware of their bad credit, and they often think they have no other options. And so they often end up with ludicrously high interest rates on their loans, which these borrowers, because of the ludicrously high interest rates, have trouble servicing.
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