Surging Household Debt Is Forcing More New Yorkers To Rely On Food Pantries

As US stock benchmarks smash through one record high after the next – a central-bank driven phenomenon that disproportionately benefits the wealthy at the expense of the middle-class and working poor - booming credit-card debt is forcing more New Yorkers to seek assistance at the city’s food pantries this holiday season, according to a report in the New York Post.

As revealed by the latest New York Fed data – which we cited earlier this month - US household debt has grown by $605 billion in the 12 months through the end of the third quarter. Q3 marked the thirteenth consecutive month of expansion as $116 billion was added to consumers’ aggregate debt pile. And while credit debt is climbing aggressively – it jumped 3.1% in Q3 alone - mortgages, student loans and auto loans are also swelling. To put this in context, consumers’ aggregate debt burden, which is just under $13 trillion, is equivalent to 66% of GDP, and has also surpassed its peak from the run-up to the crisis.

The result is that more New Yorkers are forced to rely on food pantries while dodging calls from debt collectors.

“We’ve seen a large increase in credit card debt for the population we are serving in New York,” said Laine Rolong, senior manager at the financial empowerment program at the Food Bank for New York City.

 

Rolong noted that many food pantries it serves in the city have had to turn hungry people away lately in the face of rising demand for limited emergency food stocks.

 

One expert says the credit card binge reminds him of the buildup to the financial crisis of 2007 and 2008. And this, say other experts, could be the telltale sign of an imminent recession.

Furthermore, the Fed data reveal a troubling rise in delinquencies for credit-card and auto debt that has befuddled central bankers (though regular working people might be able to think of a few factors driving this trend).

Unsurprisingly, this is forcing consumers to resort to patterns of behavior that debt-relief experts say they haven’t seen since the crisis.

“I would say this is very similar to what I saw 10 years ago - people using their credit cards quite a bit,” said Kevin Gallegos, a senior vice president at Freedom Debt Relief, a debt settlement company for consumers.

 

Back then, when total household debt was heading toward a peak of $12.68 trillion (which ended in disaster), debt-burdened consumers were addicted to cards — often those offering a tantalizing zero-percent monthly interest rate for as long as 12 months or more.

 

That strategy, now back in vogue, often ends in tears as the debt piles up. “By the time the consumer has moved their balances to the fourth card at zero percent, companies eventually cut them off for the next card,” said Gallegos.

 

The fallout can be dreadful. “We’ve had clients tell us they are on the verge of suicide, their marriages are breaking up, or ‘I don’t have enough to put food on my table,’” said Gallegos. “We hear sad stories all the time.”

Gallegos’s words echo a warning issued by the New York Fed three months ago.

“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.”

What makes this trend particularly troubling is that, if the last crisis taught consumers anything, it’s that they can’t depend on the federal government to bail them out if things go south in a hurry. The Fed and Congress will probably stick to the tried-and-true playbook of bailing out the banks, while millions of Americans are forced from their homes and into impecunity in a retread of the financial crisis. Only this time, it’ll be subprime credit card debt and auto debt – not mortgages – that sink the economy.

U.K. Litigation Cases On Defaulted Consumer Debts Soar Beyond 2008 Levels

Last month, S&P warned that UK lenders could incur £30 billion of losses on their consumer lending portfolios consisting of credit cards, personal and auto loans if interest rates and unemployment rose sharply.  Much like in the U.S., S&P warned that "loose monetary policy, cheap central bank term funding schemes and benign economic conditions" had fueled an "unsustainable" yet massive expansion of consumer credit that will inevitably end badly.  Per The Guardian:

The rapid rise in UK consumer debt to £200bn from car finance, personal loans and credit cards is unsustainable at current growth rates and should raise “red flags” for the major lenders, ratings agency Standard & Poor’s has warned.

 

In detailed analysis of the sector, S&P warned that losses from this form of lending suffered by banks and other financial institutions could be “sharp and very sudden” in an economic downturn and may be exacerbated if the Bank of England increased interest rates.

 

It also warned that it could downgrade banks’ credit ratings if the high growth rate persisted or banks took on too much risk in this sector. But it did not fear any system-wide impact from consumer credit.

 

“Loose monetary policy, cheap central bank term funding schemes and benign economic conditions have supported consumer credit supply and demand,” S&P said.

 

Annual growth rates in UK consumer credit of 10% a year have outpaced household income growth, which is closer to 2%, and become a focus for the Bank which is scrutinising lenders’ approach to the sector.

 

“We believe the double-digit annual growth rate in UK consumer credit would be unsustainable if it continued at the same pace,” S&P said.

Now, new data surrounding the growing number of court filings related to the recovery of consumer debts highlights just how serious the personal leverage problem has become in the UK.  As the FT points out this morning, there have been over 900,000 court judgements on consumer debts in just the first 9 months of 2017, up 34% compared to the same period in 2016, compared to only 827,000 at  the height of the great recession in 2008.

Consumers who refuse to repay their debts are increasingly being taken to court, with litigation at levels last seen in the run-up to the 2007-08 financial crisis.

 

New figures show there were 910,345 county court judgments in the nine months to the end of September. This is an increase of 34 per cent per on the same period in 2016, and compares with 827,000 in the whole of 2008, at the onset of the financial crisis.

 

The rise in court judgments is another indication of the high levels of unsecured debt weighing on British consumers, with Bank of England data showing that borrowing through credit cards, overdrafts and car loans has topped £200bn for the first time since the global crisis.

 

Although UK unemployment is at all-time lows, growth in real incomes and the savings rate have both deteriorated in recent months, suggesting household finances are worsening. Many economists are predicting a slowdown in what has been robust consumer spending.

This should come as little surprise to our readers as we pointed out earlier this summer that the U.K. auto market had seemingly taken a page from U.S. subprime lenders by offering a brand new car, with no money down, to anyone who walks into a dealership with a pulse (see: Undercover Investigation Exposes Deteriorating Auto Lending Standards In Europe; No Job, No Problem) . As the Daily Mail pointed out, their undercover reporters visited a total of 22 dealerships and were repeatedly offered cars of various values with no money down and despite reporters admitting that they had no job and no source of income.

Reporters visited 22 dealerships in England and Scotland, saying they were in their early twenties and either unemployed, on low incomes or trying to buy a car despite having poor credit ratings. Half of the dealerships – including ones selling Audis, Mazdas, Suzukis, Fords, Vauxhalls and Seats – told them they could have a brand new car without paying a penny up front.

 

In each case they were offered Personal Contract Purchase (PCP) deals – a type of car loan that now makes up nine out of ten car sales bought on finance in Britain.

 

These deals offer smaller monthly payments than traditional car loans.

 

A reporter who said he was working part-time on the minimum wage was offered a £15,000 Seat Ibiza without a deposit at a Seat dealership in Manchester.  Another reporter suggested that he had bad credit, but he was offered an £8,600 Vauxhall Corsa in Birmingham.

 

Kevin Barker, 71, found himself £3,500 in debt when he suffered a heart attack six months into a PCP deal. He said a ‘pushy’ Toyota salesman ‘pressured’ him into taking out a 36-month agreement in November 2014 and he was not told of the repercussions if he fell ill or lost his job.

Of course, excessively levered household balance sheets work wonders for gaming GDP growth...that is, right up until the point that interest rates start to rise and those households realize their ability to "afford" their spending binge was nothing more than a temporary blip courtesy of accomodative interest rate policies...the reversal of which will now render many of them bankrupt.

Visualizing 5,000 Years Of Consumer Credit Growth

Consumer credit may seem like a fairly new invention – but, as Visual Capitalist"s Jeff Desjardins details below, it’s actually been around for more than 5,000 years!

In fact, many millennia before the credit score became ubiquitous, there is historical evidence that cultures around the world were borrowing for various reasons. From the writings in Hammurabi’s Code to the exchanges documented by the Ancient Romans, we know that credit was used for purposes such as getting enough silver to buy a property or for agricultural loans made to farmers.

CONSUMER CREDIT: 3,500 B.C. TO TODAY

In today’s infographic from Equifax, we look at the long history of consumer credit – everything from the earliest writings of antiquity to the modern credit boom that started in the 20th century.

Consumer credit has evolved considerably from the early days.

Over the course of several millennia, there have been credit booms, game-changing innovations, and even periods such as the Dark Ages when the practice of charging interest (also known as “usury”) was considered immoral by some people.

A TIMELINE OF CONSUMER CREDIT

Below is a timeline of the significant events that have helped lead to the modern consumer credit boom, in which Americans now have over $12.4 trillion borrowed through mortgages, credit cards, student loans, auto loans, and other types of credit.

THE ANCIENTS AND CREDIT

3,500 BC – Sumer
Sumer was the first urban civilization – with about 89% of its population living in cities. It is thought that here consumer loans, used for agricultural purposes, were first used.

1,800 BC – Babylon
The Code of Hammurabi was written, formalizing the first known laws around credit. Hammurabi established the maximum interest rates that could be used legally: 33.3% per year on loans of grain, and 20% per year on loans of silver. To be valid, loans had to be witnessed by a public official and recorded as a contract.

50 BC – The Roman Republic
Around this time, Cicero noted that his neighbor bought 625 acres of land for 11.5 million sesterces.

Did this person literally carry 11.5 tons of coins through the streets of Rome? No, it was done through credit and paper. Cicero writes “nomina facit, negotium conficit” – or, “he uses credit to complete the purchase”.

MORAL CONCERNS ABOUT LENDING

800 – The Dark Ages in Europe
After the collapse of the Western Roman Empire, economic activity grinded to a halt. The Church even banned usury, the practice of charging interest on loans, for all laymen under Charlemagne’s rule (768-814 AD).

1500 – The Age of Discovery
As European explorers and merchants begin trade missions to faraway lands, the need for capital and credit increases.

1545 – England
After the Reformation, the first country to establish a legal rate of interest was England in 1545 during the reign of Henry VIII. The rate was set at 10%.

1787 – England
Philosopher Jeremy Bentham writes a treatise called “A Defense of Usury”, arguing that restrictions on interest rates harm the ability to raise capital for innovation. If risky, new ventures cannot be funded, then growth becomes limited.

THE BIRTH OF MODERN CONSUMER CREDIT

1803 – England
Credit reporting itself originated in England in the early 19th century. The earliest available account is that of a group of English tailors that came together to swap information on customers who failed to settle their debts.

1826 – England
The Manchester Guardian Society is formed, and later begins issuing a monthly newsletter with information about people who fail to pay their debts.

1841 – New York
The Mercantile Agency is founded, and starts systemizing rumors about the character and assets held by debtors through a network of correspondents. Massive ledgers in New York City are made, though these reports were heavily subjective and biased.

1864 – New York
The Mercantile Agency is renamed the R. G. Dun and Company on the eve of the Civil War, and finalizes an alphanumeric system for tracking creditworthiness of companies that would remain in use until the twentieth century.

1899 – Atlanta
The Retail Credit Company was founded, and begins compiling an extensive list of creditworthy customers. Later on, the company would change its name to Equifax. Today, it is the oldest of the three major credit agencies today in the United States.

THE CONSUMER CREDIT BOOM

1908 – Detroit
Henry Ford’s Model T makes automobiles accessible to the “great multitude” of people, but they were still too expensive to buy with cash for most families.

1919 – Detroit
GM solves this problem by loaning consumers the money they need to buy a new car. General Motors Acceptance Corporation (GMAC) is founded and popularizes the idea of installment plan financing. Consumers can now get a new car with just a 35% downpayment at time of financing.

1930 – United States
By this time, efficient U.S. factories are pumping out cheaper consumer products and appliances. Following the lead of GM, now washing machines, furniture, refrigerators, phonographs, and radios can be bought on installment plans. It’s also worth noting that in this period, 2/3 of all autos are bought on installment plans.

THE FIRST IN BIG DATA

1950 – United States
By 1950, typical middle-class Americans already had revolving credit accounts at different merchants. Maintaining several different cards and monthly payments was inconvenient, and created a new opportunity.

At the same time, Diners Club introduces their charge card, which helps open the floodgates for other consumer credit products.

1955 – United States
Early credit reporters use millions of index cards, sorted in a massive filing system, to keep track of consumers around the country. To get the latest information, agencies would scour local newspapers for notices of arrests, promotions, marriages, and deaths, attaching this information to individual credit files.

1958 – United States
BankAmericard (now Visa) is “dropped” in Fresno, California. American Express and Mastercard soon follow, offering Americans general credit for a wide range of purchases.

1960 – United States
At a time when the technology was limited to filing cabinets, the postage meter, and the telephone, American credit bureaus issued 60 million credit reports in a single year.

1964– United States
The Association of Credit Bureaus in the U.S. conducts the first studies into the application of computer technologies to credit reporting. Accuracy of data is also improved around this time by standardizing credit application forms.

1970 – United States
The first Fair Credit Reporting Act is passed in the United States. It establishes a standard legal framework for credit reporting agencies.

1980s – United States
The three biggest credit bureaus attain universal coverage across the country.

1989 – United States
The FICO score is introduced, and quickly becomes a standard system to measure credit scores based on objective factors and data.

2006 – United States
VantageScore is created through a joint-venture between the top three credit scoring agencies. This new consumer credit-scoring model is used by 10% of the market, and 6 of the 10 largest banks use VantageScore.

MODERN CREDIT

The Information Age has enabled a new era in consumer credit and assessing risk – and today, credit reports are used to inform decisions about housing, employment, insurance, and the cost of utilities.

Learn more about how data, the internet, and modern computing is changing credit in Part 2 of this series.

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

After we first reported last week that US credit card debt hit a new all time high with both student and auto loans rising to fresh records with every new report...

... it won"t 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 12th consecutive quarter, and are now $164 billion higher than the previous peak of $12.68 trillion set in Q3, 2008. As of June 30, 2017, total household indebtedness was $12.84 trillion, or 69% of US GDP: a $114 billion (0.9%) increase from the first quarter of 2017 and up $552 billion from a year ago. Overall household debt is now 15.1% above the Q2 2013 trough.

Mortgage balances, the largest component of household debt, increased again during the first quarter to $8.69 trillion, an increase of $64 billion from the first quarter of 2017. Balances on home equity lines of credit (HELOC) were roughly flat, and now stand at $452 billion. Non-housing balances were up in the second quarter. Auto loans grew by $23 billion and credit card balances increased by $20 billion, while student loan balances were roughly flat.

• Confirming the slowdown in mortgage activity, mortgage originations in Q2 declined to $421 billion from $491 billion. Meanwhile, there were $148 billion in auto loan originations in the second quarter of 2017, an uptick from the first quarter and about the same as the very high level in the 2nd quarter of 2016.


• Auto loan balances increased by $23 billion, continuing their 6-year trend. Auto loan delinquency rates increased slightly, with 3.9% of auto loan balances 90 or more days delinquent on June 30. The aggregate credit card limit rose for the 18h consecutive quarter, with a 1.6% increase.


• Outstanding student loan balances rose modestly, and stood at $1.34 trillion as of June 30, 2017. The second quarter typically witnesses slow or no growth in student loan balances due to the academic cycle. As discussed previously, a perilously high 11.2% of aggregate student loan debt was 90+ days delinquent or in default in 2017 Q2.

In a troubling development, the report noted that the distribution of the credit scores of newly originating mortgage and auto loan borrowers shifted downward somewhat, as the median score for originating borrowers for auto loans dropped 8 points to 698, and the median origination score for mortgages declined to 754. For now this credit score decline has not impacted the credit market: about 85,000 individuals had a new foreclosure notation added to their credit reports in the second quarter as foreclosures remained low by historical standards.

And while much of the report was in line with recent trends, and the overall debt that was delinquent, at 4.8%, was on par with the previous quarters, the NY Fed did issue a red flag warning over the transitions of credit card balances into delinquency, which the New York Fed said "ticked up notably."

Discussing the troubling deterioration in credit card defaults, first pointed out here in April, the New York Fed said that credit card balance flows into both early and serious delinquencies increased from a year ago, describing this as "a persistent upward movement not seen since 2009." As shown in the chart below, the transition into 30 and 90-Day delinquencies has, over the past two quarters, surged to the highest rate since the first quarter of 2013, suggesting something drastically changed in the last three quarters when it comes to US consumer behavior.

“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, is 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. 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.

As for the "further uptick in consumer distress", we are just guessing but the fact that credit card defaults are jumping at a time when sales at fast food and other restaurants have declined for 17 consecutive quarters, and when $250 billion in US household savings was just "revised" away, may all be connected.

Bank Of England Warns Of "Spiral Of Complacency" Over Soaring Consumer Debt

A few weeks ago, we wrote a note about how European auto lenders are becoming just about as ridiculously undisciplined as their counterparts in the United States.  Apparently an ever-growing reliance of European millennials on lease financing has auto ABS investors worried about a potential crash in used car prices at some point in the not so distant future...that sound familiar to anyone?  (See: It"s Not Just Americans, Europe"s New Obsession With Auto Leases Is "Catastrophic For Used Car Prices")

Then came an undercover investigation by the Daily Mail exposing just how "undisciplined" the auto lending market has become in England.  Their undercover reporters visited a total of 22 dealerships and were repeatedly offered cars of various values with no money down and despite reporters admitting that they had no job and no source of income. 

Reporters visited 22 dealerships in England and Scotland, saying they were in their early twenties and either unemployed, on low incomes or trying to buy a car despite having poor credit ratings. Half of the dealerships – including ones selling Audis, Mazdas, Suzukis, Fords, Vauxhalls and Seats – told them they could have a brand new car without paying a penny up front.

In each case they were offered Personal Contract Purchase (PCP) deals – a type of car loan that now makes up nine out of ten car sales bought on finance in Britain.

These deals offer smaller monthly payments than traditional car loans.

A reporter who said he was working part-time on the minimum wage was offered a £15,000 Seat Ibiza without a deposit at a Seat dealership in Manchester.  Another reporter suggested that he had bad credit, but he was offered an £8,600 Vauxhall Corsa in Birmingham.

Kevin Barker, 71, found himself £3,500 in debt when he suffered a heart attack six months into a PCP deal. He said a ‘pushy’ Toyota salesman ‘pressured’ him into taking out a 36-month agreement in November 2014 and he was not told of the repercussions if he fell ill or lost his job.

And while offering $20,000 auto loans to unemployed teenagers may not seem like that big a deal to U.S. consumers, in Britain it apparently has a lot of bankers worried.  As Alex Brazier of the Bank of England put it in a recent Liverpool speech, lenders are "dicing with a spiral of complacency."  Per The Guardian:

“Ten years ago, an unsafe financial system caused financial crisis and economic disaster”, he said. “The western banking system had expanded rapidly. Banks – and their regulators – had been blind to the basic fact that more debt meant greater risk of loss.

“Complacency gave way to crisis. Companies and households were unable to refinance their debts. The result was economic disaster. In this country alone, close to a million jobs were lost and more than 100,000 businesses failed. Too much debt made the financial system, and the economy, unsafe. Too many people paid the price when those risks materialised.”

“Lenders have not entered, but they may be dicing with the spiral of complacency,” Brazier said, noting that as credit became cheaper it was taken up more widely and was serviced more easily.

“The spiral continues, and borrowers rack up more and more debt. Lending standards can go from responsible to reckless very quickly. The sorry fact is that as lenders think the risks they face are falling, the risks they – and the wider economy – face are actually growing,” Brazier said.

“By September we will have assessed whether the rapid growth has created any gap in the line. If it has, we’ll plug it,” Brazier said.

Of course, when lending standards enter their "spiral of complacency" phase, it"s not just a single asset class that"s impacted.  As The Guardian notes, loan terms for everything from credit cards to personal loans to mortgages have all participated in the consumer credit mania...

He added that terms and conditions on credit cards and personal loans had become easier. The average advertised length of 0% credit card balance transfers had doubled to close to 30 months, while advertised interest rates on £10,000 personal loans had fallen from 8% to around 3.8%, even though official interest rates had barely changed.

He added that developments in mortgage debt had been much less striking than those in consumer debt and car finance, with lending for home loans up by just 3% over the past year. “But even here there are some tentative signs of boundaries being pushed,” he said.

Strong competition for business was resulting in more lending at higher loan-to-income (LTI) multiples, with the share at an LTI above 4 increasing from 19% to 26% over the past two years.

...all of which has resulted in a stern warning from the BoE that failure to unilaterally reign in reckless lending standards would inevitably result in a new regulations.

The Bank of England has told banks, credit card companies and car loan providers that they risk fresh action against reckless lending as it warned of a looming “spiral of complacency” about mounting consumer debt.

In its toughest warning yet about the possibility of a rerun of the financial crisis that devastated the economy 10 years ago, Threadneedle Street admitted it was alarmed about the increase in the amount of money being borrowed on easy terms over the past year.

“Household debt – like most things that are good in moderation – can be dangerous in excess”, Alex Brazier, the Bank director for financial stability, said in a speech in Liverpool. “Dangerous to borrowers, lenders and, most importantly from our perspective, everyone else in the economy.”

"Lenders have been the lucky beneficiaries of the benign way the economy has evolved. In expanding the supply of credit, they may be placing undue weight on the recent performance of credit cards and loans in benign conditions,” Brazier said.

Of course, if new regulations fail to materialize then British banks can always do what American banks do...simply package up their toxic consumers loans into a nice securitized product and sell it to taxpayer backed pension funds...it"s a much cleaner way to socialize poor lending standards as opposed to waiting around for more overt "bailouts" later on down the road...

Millions Of Americans Just Got An Artificial Boost To Their Credit Score

Back in August 2014, we first reported that in what appeared a suspicious attempt to boost the pool of eligible, credit-worthy mortgage and auto recipients, Fair Isaac, the company behind the crucial FICO score that determines every consumer"s credit rating, "will stop including in its FICO credit-score calculations any record of a consumer failing to pay a bill if the bill has been paid or settled with a collection agency. The San Jose, Calif., company also will give less weight to unpaid medical bills that are with a collection agency." In doing so, the company would "make it easier for tens of millions of Americans to get loans."

Then, back in March of this year, in the latest push to artificially boost FICO scores, the WSJ reported that "many tax liens and civil judgments soon will be removed from people’s credit reports, the latest in a series of moves to omit negative information from these financial scorecards. The development could help boost credit scores for millions of consumers, but could pose risks for lenders" as FICO scores remain the only widely accepted method of quantifying any individual American"s credit risk, and determine how much consumers can borrow for a new house or car as well as determine their credit-card spending limit

Stated simply, the definition of the all important FICO score, the most important number at the base of every mortgage application, was set for a series of "adjustments" which would push it higher for millions of Americans.

 

The outcome of these changes was clear for the 12 million people impacted: it "will make many people who have these types of credit-report blemishes look more creditworthy."

Now, as the Wall Street Journal points out today, efforts to rig the FICO scoring process seems to be bearing some fruit.  The average credit score nationwide hit 700 in April, according to new data from Fair Isaac Corp., which is the highest since at least 2005.

Meanwhile, the share of consumers deemed to be riskiest, with a score below 600, hit a new low of roughly 40 million, or 20% of U.S. adults who have FICO scores, according to Fair Isaac. That is down from 20.5% in October and a peak of 25.5% in 2010.

Of course, to be fair, we are also reaching that critical 7-year point where the previous wave of mortgage foreclosures start to magically disappear from the FICO scores of millions of Americans. 

Mortgage foreclosures stay on credit reports for up to seven years dating back to the missed payment that resulted in the foreclosure. Foreclosure starts, the first stage in the process, peaked in 2009 at 2.1 million, according to Attom Data Solutions. They totaled nearly 1.8 million in 2010 and remained above one million during each of the next two years.

Personal bankruptcies are more complicated and can stay on credit reports for seven to 10 years.

Consumers who filed in 2007 for Chapter 7 protection—the most common type of bankruptcy, in which certain debts are discharged and creditors can get paid back from sales of consumers’ assets—are now starting to see those events fall off their reports. Some 500,000 Chapter 7 bankruptcy cases were filed in 2007, a figure that swelled to nearly 1.1 million in 2010, according to the Administrative Office of the U.S. Courts.

Chapter
13 bankruptcies, in which consumers enter a payment plan with creditors, usually stay on reports for at least seven years. Those filings reached a recent peak of nearly 435,000 in 2010 and are set to start falling off reports this year.

All of which, as the WSJ points out, will help to "boost originations of large-dollar loans for cars and homes."  Which is precisely what the average, massively-overlevered American household needs...more debt.

Fresh starts for credit reports are likely to help boost originations of large-dollar loans for cars and homes. Consumers have a greater chance of getting approved for financing if they apply for loans after negative events fall off their reports, in particular from large banks that have stuck to strict underwriting criteria, says Morgan Whitacre, who oversees consumer-loan underwriting at Bank of America Corp.

Credit-card lending, already on the rise, could increase further as a result of fresh starts. Consumers who have one type of bankruptcy filing removed from their credit report experience a roughly $1,500 increase in spending limits and rack up $800 more in credit-card debt within three years, according to the Federal Reserve Bank of New York.

So maybe that auto lending bubble has a little room left to run afterall...

US Household Debt Surpasses 2008 High, Hits Record $12.7 Trillion

Total debt held by US household reached $12.73 trillion in the first quarter of 2017, finally surpassing its $12.68 trillion peak reached during the recession in 2008 according to the NY Fed"s latest quarterly report on household debt. This marked a$479 billion increase from a year ago, and up $149 billion from Q4 2016 after 11 consecutive quarters of growth since the deleveraging period immediately following the Great Recession.

the quick and durty breakdown:

• Total household indebtedness stood at $12.73 trillion as of March 31, 2017. This increase put overall household debt $50 billion above its previous peak set in the third quarter of 2008 and 14.1 percent above the trough set in the second quarter of 2013.


• Mortgage balances, the largest component of household debt, reached $8.63 trillion as of March 31, a $147 billion uptick from the fourth quarter of 2016.


• Balances on home equity lines of credit fell slightly in the first quarter, down $17 billion to $456 billion.


• Non-housing debt saw mixed changes—an increase of $10 billion in auto loans and $34 billion in student loan balances, and a $15 billion drop in credit card balances.

Despite the new nominal all time high, on a relative basis, household debt remained below past levels in relation to the size of the overall U.S. economy, and in Q1 total debt was 66.9% of GDP, nearly 20% lower compared to 85.4% of GDP in Q3 of 2008.

Immediately following the 2009-2009 crisis, Americans reduced their debts to an unusual extent: a 12% decline from the peak in the third quarter of 2008 to the trough in the second quarter of 2013. New York Fed researchers, cited by the WSJ, described the drop as “an aberration from what had been a 63-year upward trend reflecting the depth, duration and aftermath of the Great Recession.”

Compared to 2008, balance sheets also look different now, with less housing-related debt and more, make that much, much more student and auto loans. As of the first quarter, 67.8% of total household debt was in the form of mortgages; in the third quarter of 2008, mortgages were 73.3% of total debt. Student loans rose from 4.8% to 10.6% of total indebtedness, and auto loans went from 6.4% to 9.2%.

“Almost nine years later, household debt has finally exceeded its 2008 peak but the debt and its borrowers look quite different today. This record debt level is neither a reason to celebrate nor a cause for alarm. But it does provide an opportune moment to consider debt performance,” said Donghoon Lee, Research Officer at the New York Fed.

“While most delinquency flows have improved markedly since the Great Recession and remain low overall, there are divergent trends among debt types. Auto loan and credit card delinquency flows are now trending upwards, and those for student loans remain stubbornly high.”

Overall credit rose at a brisk pace, led by $147 billion in  mortgage originations, $34 billion in student loans and $10 billion in auto loan increase, the overall pace of new lending slowed from the strong fourth quarter. Mortgage balances rose 1.7% last quarter from the final three months of 2016, while home-equity lines of credit were down 3.6% in the first quarter. Automotive loans rose 0.9% and student loans climbed 2.6%. Credit-card debt fell 1.9%, and other types of debt were down 2.7% from the fourth quarter.

Further details from the report:

Housing Debt

• Mortgage balances increased again while originations declined and median credit scores of borrowers for new mortgages increased, reflecting tightening underwriting. There was $491 billion in newly originated mortgages this quarter.


• Mortgage delinquencies worsened slightly, with 1.7% of mortgage balances 90 or more days delinquent in 2017Q1. About 91,000 individuals had a new foreclosure notation added to their credit reports between January 1 and March 31st, an increase since 2016Q4, although foreclosures remain low by historical standards

We were surprised by the NY Fed"s optimistic read on mortgage originations which declined only modestly according to Equifax numbers...

... whereas the biggest US mortgage lender - Wells Fargo - recently reported a historic collapse in new mortgage applications, which lead originations, in the first quarter.

Non-Housing Debt

• Auto loan balances increased by $10 billion Q/Q and $96 billion Y/Y, continuing their 6-year trend. Auto loan delinquency rates were flat, with 3.8% of auto loan balances 90 or more days delinquent on March 31.


• Credit card balances declined by $15 billion Q/Q but increased by $52 billion Y/Y to $764 billion, while 90+ day delinquency rates deteriorated, and now stand at 7.5%.


• Outstanding student loan balances increased by $34 billion Q/Q and $83 billion Y/Y, and stood at $1.34 trillion as of March 31, 2017, marking an increase in every year throughout the 18-year history of this series.

Confirming the broader transition to renter-housing, mortgage lending to subprime borrowers has collapsed since the housing crisis (both due to a reduction in demand and supply) in favor of loans to more crerdit-worthy borrowers. According to the detailed NY Fed report, in Q1, borrowers with credit scores under 620 accounted for 3.6% of mortgage originations, compared with 15.2% a decade earlier. The inversion at the top was also notable, as borrowers with credit scores of 760 or higher were 60.9% of originations last quarter, versus 23.9% in the first quarter of 2007.

Unlike houseing, howevern subprime auto loans have remained abundant, helping fuel the record vehicle sales of recent years as interest rates have been low. Some 19.6% of auto-loan originations last quarter went to borrowers with credit scores below 620, down from 29.6% a decade earlier according to the WSJ. The median credit score for auto-loan originations in the first quarter was 706, compared with 764 for mortgage originations.

A closer look at household bankruptcies & delinquencies in a time of near record low interest rates reveals the following:

• Aggregate delinquency rates were roughly flat.


• Bankruptcy notations reached another low the 18-year history of this series.


• 7.5% of all credit card debt was seriously delinquent in Q1 2017


• 11% of all student debt was seriously delinquent in Q1 2017


• 3.8% of all auto loan debt was seriously delinquent in Q1 2017

Additionally, this quarter saw a notable uptick in credit card debt transitioning into delinquencies, a continued upward trend of auto loans transitioning into serious delinquencies, and student loan transitions into serious delinquencies remaining high.

The aggregate default rate in Q1 was 4.8%, or roughly unchanged with some variation across product types. As of March 31, 4.8% of outstanding debt was in some stage of delinquency. Of the $615 billion of debt that is delinquent, $426 billion is seriously delinquent (at least 90 days late or “severely derogatory”). The percent of student loan balances that transition to serious delinquency has remained high, hovering around 10 % at an annual rate over the past five years.

* * *

Perhaps the most troubling update in the Q1 credit update was that the number of credit inquiries within the past six months – an indicator of consumer credit demand – declined from the previous quarter, to 162 million. This confirms what the NY Fed reported in its latest Senior Loan Officers Survey which found an unexpected collapse in both credit and auto loan demand.

It also helps explain the recent crash in both C&I and total loan issuance.

Declining household loan growth demand is typically an indication of a contracting economy. It is likely to deteriorate further as a result of rising interest rates, as the Fed continues to hike rates, which will lead to further pressure on loan demand, and result in an even greater slowdown for the economy.