Kristian Rouz – US household debt hit a new high-point last month, the Federal Reserve Bank of New York says, highlighting the mounting risks to the health of the broader economy. This as the post-Great Recession recovery facility appears to be broken, exposing the imbalances in the generation and distribution of wealth, as well as the ongoing polarization of individual incomes.
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However, the main concern is the rise of subprime loan delinquencies in the auto credit segment. Obama-era ultra-low interest rates encouraged car-ownership across the country, while also contributed to the delusion that anyone could afford a home, the availability of higher education and credit-card purchasing power.
According to a report from the New York Fed, overall household debt rose to $12.96 trillion in the past quarter, with outstanding student debt rising to $1.36 trln, and auto loans surging to $1.21 trln.
Student loan debt delinquencies rose to 11.2 percent, while in the auto loan segment, non-performing loans accounted for 4 percent of total debt outstanding last quarter. Meanwhile, the report suggests, delinquencies on subprime loans alone – or loans, issued to presumably insolvent borrowers – have soared to critical levels, threatening to knock the entire credit system over.
"The (private equity) guys sailed into this thing with stars in their eyes. Some of the businesses have done fine and some haven’t," Chris Gillock of Colonnade Advisors said. Now, "it’s about as out-of-favor a sector as I can think of."
Subprime delinquency rates for non-bank-issued auto loans are just under 10 percent, according to a report from the New York Fed Consumer Credit Panel/Equifax.
Since 2010, private investors have put some $3 trln into non-bank auto lenders, hoping the surging demand for cars amid low-interest rates and the Obama administration’s welfare handouts would generate solid returns.
The scheme worked for a while, with a modest shale-oil-driven acceleration in the US economy in 2014-2015 contributing to an influx of cash into the debt industry. However, as the favors changed, followed by changes in the White House, being in debt is not okay any longer.
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And it isn’t pretty, either. Corporate losses on subprime auto loans have steadily increased over the past 12 months, mainly due to the rising Fed interest rates, and the declining bond yields. These investors were flourishing under Obama, but now, as the Fed rates rise, and the rally in stocks has suppressed bond yields, their profitability is way below zero.
This signals the end of the boom in the US auto market, which occurred in 2015-2016.
"At rates of 11 percent or more, there was plenty to be made as sales boomed," Gabrielle Coppola and Claire Boston of Bloomberg write. "But now, with new car demand waning, they’ve found intense competition – and the lax underwriting standards it fostered – are taking a toll on profits."
"From the standpoint of subprime auto right now, if you’re small, people aren’t lining up," David Knightly of Innovate Auto Finance said. "Everybody’s trying to guess when the next 2008 is."
However, it is unlikely the broader economy will be dealt a serious blow in case the subprime auto loan market collapses, as it is fairly small compared to the mortgage segment, which rocked the system back in 2007.
Nonetheless, a lot of people are facing a potential deterioration in their personal finances, and auto loan-related bankruptcies are just around the corner – both on the borrower and the lender end of the equation.
