Equifax Web-Page Goes Offline Amid Reports Of New Breach

Equifax has taken one of its web pages offline as its security team looks into reports of another potential cyber breach, the credit reporting company, which recently disclosed a hack that compromised the sensitive information of 145.5 million people, said on Thursday.

"We are aware of the situation identified on the equifax.com website in the credit report assistance link," Equifax spokesman Wyatt Jefferies said in an email.

"Our IT and security teams are looking into this matter, and out of an abundance of caution have temporarily taken this page offline."

As CBC reports, the move came after an independent security analyst on Wednesday found part of Equifax"s website was under the control of attackers trying to trick visitors into installing fraudulent Adobe Flash updates that could infect computers with malware, the technology news website Ars Technica reported.

When I clicked it (from Gmail on Android) I was redirected to a spam page shortly after seeing the Equifax credit file form.

I thought maybe it was an anomaly because it didn"t happen again. But after reading your article about how sometimes hacks will redirect randomly I tried the link again just now and sure enough I got a spam page again (lucksupply.club saying I won an iPhone X). This is Chrome-in-a-tab from Gmail so i don"t believe there"s any extensions or other malware on my device that could have caused this redirect.

EFX share price is tumbling...

Draining the Swamp: Credit Scores and Housing Finance Reform

News that Senator Bob Corker (R-TN) is retiring from the Senate was not welcome news for advocates of reform in the government-controlled world of housing finance.  "A big loss," said John Thune (R-SD). "He"s always been a guy who"s really about trying to find solutions, common ground, and getting results."

Corker was indeed somebody who would work with his colleagues across the isle, but he was also willing to work period on difficult and contentious issues like housing, something few members are willing to do.  His departure leaves a considerable vacuum in terms of the capacity of Congress to engage on the issue of housing finance, much less pass legislation.

As the mortgage finance industry heads into the last quarter of 2017, we are still running about 30% down in terms of lending volumes compared to last year, the result of the post election pop in yields for US Treasury bonds that killed the declining refinance market.  No amount of innovation, quantitative easing from the Federal Open Market Committee, or new, more accommodating credit scores can make up for this sharp decline in production of mortgage loans. 

Meanwhile in Washington, the prospects for ending the decade-long conservatorship of Fannie Mae and Freddie Mac are dim at best.  In his statement to Congress last week, Melvin L. Watt, Director of the Federal Housing Finance Authority, said “ that these conservatorships are not sustainable and they need to end as soon as Congress can chart the way forward on housing finance reform.”  But nobody on Capitol Hill seems to consider the status quo a problem when it comes to Fannie Mae and Freddie Mac.

Watt is headed for a potential confrontation with the Trump Administration and Congress over the issue of maintaining minimum capital for the GSEs, but ultimately he must blink.  In his remarks, the former congressman from North Carolina seemingly made clear that he is preparing to modify the “sweep” of profits from both enterprises to the Treasury to prevent one or both from becoming technically insolvent, an eventuality that would require support from the Treasury. Watt stated:

 “Like any business, the Enterprises need some kind of buffer to shield against short-term operating losses.  In fact, it is especially irresponsible for the Enterprises not to have such a limited buffer because a loss in any quarter would result in an additional draw of taxpayer support and reduce the fixed dollar commitment the Treasury Department has made to support the Enterprises.  We reasonably foresee that this could erode investor confidence.  This could stifle liquidity in the mortgage-backed securities market and could increase the cost of mortgage credit for borrowers.”

While by law the Treasury’s ability to support the GSEs with new capital is limited, bond market investors and the credit rating community accords “AAA” ratings to Fannie and Freddie because of the fact of the conservatorship and the presumption of unlimited credit support from the United States.  Whether such confidence is reasonable given the current posture of Congress and the Executive Branch when it comes to the GSEs and federal debt more generally is another matter entirely. 

Watt is aware of this market reality and what a repeat of the 2008 bond market debacle would mean to the mortgage market and US taxpayers.  Yet despite his tough talk, it is not safe to assume that Watt will direct the GSEs to start accumulating capital. He said in blunt terms:

“FHFA has explicit statutory obligations to ensure that each Enterprise ‘operates in a safe and sound manner’ and fosters ‘liquid, efficient, competitive, and resilient national housing finance markets.’  To ensure that we meet these obligations, we cannot risk the loss of investor confidence.  It would, therefore, be a serious misconception for members of this Committee, or for anyone else, to consider any actions FHFA may take as conservator to avoid additional draws of taxpayer support either as interference with the prerogatives of Congress, as an effort to influence the outcome of housing finance reform, or as a step toward recap and release.  FHFA"s actions would be taken solely to avoid a draw during conservatorship.”

Watt may seem willing to make changes in the way that the GSEs compensate taxpayers for the continued sovereign credit support given to both enterprises, yet is unlikely to act.  But he continues to be skeptical of calls for FHFA to allow alternative credit scores when underwriting loans covered by insurance in the GSE market. “FHFA has received overwhelming feedback from the industry that it would be a serious mistake to change credit scoring models before the Enterprises implement the Single Security in mid-2019,” Watt told Congress, reflecting the view of many mortgage market participants.

The incumbent consumer credit bureaus – Experian, TransUnion and Equifax – have been pushing a weaker credit score as an alternative to the incumbent credit scoring monopoly held by Fair Issaac’s FICO model.  Huge amounts of money have been spent to promote the alternative scores, so far with little in the way of commercial success. Indeed, most media organizations are cowed into silence by the vast amounts of money flowing from Washington c/o Equifax and the other members of the credit score triopoly.

“We have looked deeply at these issues, and this process has raised additional concerns,” Watt noted in a barely disguised rebuke for the consumer data triopoly.  “For example, how would we ensure that competing credit scores lead to improvements in accuracy and not to a race to the bottom with competitors competing for more and more customers?  Also, could the organizational and ownership structure of companies in the credit score market impact competition?”

There are certainly legitimate concerns about competition in the consumer credit market, yet the more important issue is how a change would impact the primary and secondary markets for mortgage credit.  The bond market in particular is very opposed to any change in how default risk probabilities are measured, including both investors and the credit rating agencies that serve institutional investors.

The fact is, the bond markets like having one benchmark for measuring default risk, a fact that seems to elude advocates of "competition" in credit scoring.  Having multiple benchmarks is not about competition but rather intellectual chaos.  And as the old saying goes, be careful what you wish for, you may get it. 

Fact is, were FHFA to allow for the use of multiple credit scores in underwriting loans that back Fannie Mae and Freddie Mac securities, investors and credit rating agencies would be compelled to “score” the different models. Based on what we know today about the respective credit score products, the alternative score being pushed by the three incumbent consumer credit repositories would almost certainly trade at a discount to the FICO score used in most default models.

Watt’s comments make clear that he understands that “competition” in credit scores is really about opening the credit box to higher risk borrowers.  But thanks to the benevolence of central bankers, such worries are very distant from the minds of people who live and work in Washington. 

For the past decade, the FOMC has wrapped such concerns as market liquidity and default risk with a comforting blanket of cheap money.  When banks and the GSEs come to grips with the hidden default risk currently embedded inside trillions of dollars worth of new mortgage production, the conversation about housing finance reform may take on a bit more urgency and seriousness.  But sadly, Senator Corker will have left the building.

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.

New Warning Signs Emerge For Subprime Auto Securitizations

Last month, we pointed that one of wall street"s largest underwriters of auto debt was suddenly slashing their own holdings of auto loans while simultaneously ramping up the issuance of auto securitization facilities thereby pawning off the risk to "suckers" who have no idea they"re jumping in front of yet another financial freight train (see "Deja Vu: JPM Slashes Auto Loans For Their Own Book; Ramps Up ABS Issuance For The Suckers").

Now, according to Bloomberg and Wells Fargo, new signs are emerging which suggest that auto ABS facilities, like their RMBS cousins of last decade, aren"t quite as bullet proof as the "suckers" thought they were.  While a subtle degradation, Wells Fargo points out that fewer auto borrowers are suddenly paying off their loan balances early.  And while that may not sound as dire as say a default, it suggests that auto borrowers may be finding it more difficult to find new financing when they go to trade in their 3-year old clunker for that brand new BMW.

Fewer subprime borrowers are paying off their auto loans early, a possible sign that consumers with weaker credit scores are struggling more, according to a report by Wells Fargo & Co. researchers.

Borrowers are making fewer extra payments on loans that were bundled into bonds in 2015 and 2016, compared with loans in 2013 and 2014 bonds, according to Wells Fargo analysts led by John McElravey. The data on prepayments may offer another sign that subprime consumers are having more trouble paying their bills, the analysts wrote in a note dated Tuesday. Borrowers are already defaulting on a growing amount of auto debt.

Last decade, slower monthly payment rates on credit cards were an early sign of the consumer credit cycle changing for the worse, the analysts wrote. For auto loans, slower prepayment may be more of a coincident indicator than a leading one, they wrote.

Of course, just like 2007, the largest seller of auto ABS, Wells Fargo (just as Bear Stearns did in 2007), is telling investors that they have nothing to worry about...unless you think slower paydowns and a massive declines in used car prices are a problem...

The researchers at Wells Fargo, the number one seller of bonds backed by subprime auto loans, have said that the bonds pose few risks to bondholders, even though they recommend investors cut their risk exposure because of valuations.

Slowing prepayments can hurt investors in bonds backed by car loans, said Peter Kaplan, a senior portfolio manager at Merganser Capital Management. They can result in a deal’s bonds getting paid down more slowly, which can hurt the riskiest securities in a transaction.

“I think downgrades are completely possible,” with a remote possibility that the riskiest securities will take losses, he said.

Lenders and big bond graders, such as S&P Global Ratings, have pointed to the debts’ fast amortization and possible upgrades as reasons for investors to have faith in the securities.

Of course, this is just the latest sign of trouble in auto ABS...below are recent developments in delinquency and default trends courtesy of Morgan Stanley.

***

If you"re among the growing minority of investors still under the impression that  "everything if awesome" in the auto industry simply because new car sales volumes continue to hover around all time highs, while turning a blind eye to soaring incentive spending and that pesky little debt bubble, then we may need your help with how we should be interpreting the following subprime auto loan delinquency stats from Morgan Stanley. 

In a recent report, Jeen Ng of Morgan Stanley took a look at 266 subprime auto ABS deals to assess the underlying "health" of the auto loan market and this is a recap of what he found.

First, despite low unemployment, high consumer confidence and debt-to-income ratios at 30-year lows, 60+ day delinquencies and default rates are soaring back to "great recession" levels for prime and subprime auto securitizations.

Meanwhile, loss severities are also starting to rise... 

....just as used car prices come under pressure...

...which likely has something to do with the flood of lease returns that are about to hit the market...

Of course, it can"t be that these deteriorating credit metrics are the result of 21 consecutive quarters of loosening lending standards from 2Q 2011 through 2Q 2016, right?

Lending Standards Have Eased...: While overall household debt remains below pre-crisis peaks, auto debt has ballooned to all-time highs. While this debt grew, the median FICO score of borrowers receiving auto loans fell roughly 30 points from peak to trough. According to the Senior Loan Officer Opinion Survey (SLOOS), auto lenders eased lending standards for 21 consecutive quarters from 2Q 2011 through 2Q 2016.

...but Lenders Now Appear to Be Reversing Course and Tightening Standards: While FICO scores did drop precipitously, they have recovered in recent months, and the SLOOS reports 3 quarters of tightening standards after the 21 of easing. A look at the weighted average FICO scores of loans going into subprime ABS deals reveals similar trends, with a number of lenders reporting increases in these scores over recent years. However, the overall trend has moved lower since 2013.

Meanwhile, just like in the past housing crash, the mix of "deep subprime" collateral being pawned off on the ABS market is soaring...because who else would buy it?

Shift in Deal Mix the Real Culprit: The main driver of this dynamic appears to be that, while individual lenders are increasing their weighted average FICO scores, the securitization market has become more heavily weighted towards issuers that we would consider deep subprime - those with a weighted average FICO score below 550. In fact, since 2010, the share of Subprime Auto ABS origination that has come from these deep subprime deals has increased from 5.1% to 32.5%.

Deep Subprime Driving Delinquencies: Since 2012, 60+ delinquencies of non-deep subprime deals picked up from 3.03% to 3.92%. While that 89bps increase certainly demonstrates deterioration, it pales in comparison to the over 300bps increase coming from these deep subprime deals.

But sure, 18mm new cars per year is probably a "normalized" level of demand for the U.S. market...just like 1.3mm in new home sales was "normal" in 2005.

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...

UBS Hints At Rampant Auto Lending Fraud; "It’s Not Just Smoke And Mirrors Anymore"

For months we"ve written about the imminently doomed auto bubble in the U.S., spurred in no small part by an unprecedented relaxation of underwriting standards by banks that would put even the shenanigans of the 2008 mortgage crisis to shame.  From stretched out lending terms to promotional interest rates, auto lenders have increasingly played every trick necessary to get those incremental new car buyers into the most expensive car their monthly budgets could possibly absorb.

That said, in recent weeks there has been growing concern that consumers, auto dealers and/or banks have been going beyond simply relaxing underwriting standards and have instead been forced to commit outright fraud in order to attract that incremental auto volume growth.  As UBS Strategist Matthew Mish told Bloomberg, “something is definitely going on under the hood...it’s not just smoke and mirrors anymore.”

The evidence is growing. First, the explosion of technology makes gaining access to information to improve credit scores very simple. Internet searches for "credit score" are at record levels. Second, our survey finds 21% of auto loan borrowers admitted to some form of inaccuracy in their loan applications. Third, there is growing concern reported among auto lenders around fraud, which is the extreme case of this behavior.

Overall, the explosion and adoption of technology makes gaining access to "proven" methods for improving credit scores extremely simple. To this point, the popularity of internet searches for "credit score" has been rising consistently and is near peak post-crisis levels (Figure 7). Similarly, our survey finds that 21% of auto loan borrowers admitted to some inaccuracy in their application for non-mortgage related debt (auto, student or credit card loan). More concerning, this trend may be systemic as 29% of other consumer loan (i.e., student loan, credit card) borrowers acknowledged some form of inaccuracy in their applications (Figure 8).

Of course, this isn"t the first time we"ve noted the probability that fraud is likely running rampant in auto lending markets.  In fact, according to a new study from Point Predictive, fraud rates on auto loan applications are currently reaching levels seen in the mortgage market back in 2009.  Per Bloomberg:

Borrower fraud in U.S. auto loans is surging, and may approach levels seen in mortgages during last decade’s housing bubble, according to a startup firm that helps lenders sniff out bogus borrowers.

As many as 1 percent of U.S. car loan applications include some type of material misrepresentation, executives at data analytics firm Point Predictive estimated based on reports from banks, finance companies and others. Lenders’ losses from deception may double this year to $6 billion from 2015, the firm forecast.

Those fraud rates are coming closer to the over-1-percent level for mortgages in 2009, when the financial crisis was boiling and more lenders started reporting incidents to one another, Frank McKenna, chief fraud strategist at the firm, said in an interview. While those losses will sting lenders, the impact on the overall economy will likely be much more muted than with the housing crisis, just because there’s less car debt outstanding.

Even so, “We see an extraordinary amount of parallels between the auto and mortgage industries, in terms of the rising levels of hidden fraud,” McKenna said. For home loans, it’s hard to know how widespread the deception was before 2009, because lenders often didn’t report information to one another and may not have even investigated incidents of probable lying much on their own, McKenna said.

And, right on cue, the New York City Department of Consumer Affairs was recently forced to file a petition against a group of Major World auto dealers alleging that fraudulent loan applications had been submitted to lenders that contained, among other things, inflated income and asset statements.  Per NBC New York:

According to a petition filed by the New York City Department of Consumer Affairs, sales people at the Major World dealer group prepared dozens of auto loan applications containing inflated income and asset statements. The false information helped unqualified buyers purchase vehicles they could not afford.

In 2014, the I-Team reported on Margaret Zollner, a car buyer who accused staff at Major Chevrolet of tricking her into signing a loan application that falsely stated her income was $60,000, even though she was an unemployed senior citizen who needed food stamp benefits to get by.

Zollner"s application also reported that she owned a house, but she rents her home.

"They said I made $60,000 a year. I was on food stamps," Zollner said.

At the time, a spokesperson for Major World suggested Zollner was responsible for signing her name to inaccuracies on the loan application.

All of which helps explain those surging delinquencies....

...and loss severities in ABS structures.

All great signs of a "plateau."

Where Are America's Subprime Borrowers Located

The St. Louis Fed"s FRED Blog has released an interested piece showing the geographical distribution of America"s subprime borrowers.

As author Maximiliano Dvorkin writes, most economists agree the financial sector and high levels of household debt played an important role in the last recession. But since 2008, the levels of both household debt relative to income and debt service payments relative to income have fallen. The reasons for the fall appear driven by a lower demand for credit by borrowers or stricter lending requirements by lenders. Nonetheless, an important implication of lower levels of debt and lower debt payments is an improvement in borrowers’ credit scores, as these factors would translate into less debt and fewer missed payments, which have an important weight in how these scores are computed.

The two graphs show the percentage of the population with a credit score below 660 in each U.S. county in 2009 and 2016. A person with a score below 660 will have a harder time securing credit from a lender and may have to pay a higher interest rate if a loan is secured, then again as reported earlier today, adjustments to how the FICO score is being calculated will provide an artificial boost to some 12 million Americans in the coming months.

Comparing 2009 and 2016, we see that the percentage of the population with a subprime credit score has decreased, consistent with some of the recent changes described above.

2009

2016

In addition, the graphs show that counties in the south and southeast have a larger-than-average concentration of subprime population. That said, the graphs clear do not account for impaired student loans which do not for the most part affect FICO scores, and which at $1.4 trillion, have become by far the biggest burden on the US consumer, and whose adverse impact the government has been actively coverng up. A recent breakdown of average student debt per borrower by state from the Dallas Fed shows a rather different distribution. One wonders what the above maps would look like if they incorporated the amount of delinquent student debt as well.

Are Debt-Laden American Consumers About To Get Crushed By Higher Interest Rates?

American consumers love debt, wall street loves securitizing that debt and collecting massive fees for selling it and pension funds, with no viable alternative investments courtesy of accommodative Fed policies, love buying that debt for the extra 25bps of yield it provides.  It"s a "win, win, win", right?

Well, until it"s not.  While real median incomes in the U.S. have been stagnant for almost a
decade, real household personal consumption has continued its steady
rise as American"s have simply replaced lost income with new debt.  But,
with household leverage near all-time highs and interest rates on the
rise, we suspect this could all end very badly for the U.S. consumer and those pension funds that were forced to "stretch for yield."

Per a Bloomberg article posted today, the average U.S. household is carrying roughly $133,000 worth of debt, spread between mortgages, credit cards, auto loans, student loans and the newly-popular, crowd-funded, personal loans. 

To be sure, while staggering, this is nothing new as the growth of U.S. consumer debt has basically gone exponential since the early 90"s.

Meanwhile, real median household income has yet to recover to pre-recession 2007 levels.

That said, up until now, the cost of the staggering increases in notional consumer debt outstanding has been offset by lower interest rates.  As a result, historically low rates have have kept the ratio of household debt service to disposable income levels near multi-decade lows. 

But rising rates could change all this in the very near future.  As a quick example, lets assume the median household makes $56,000 per year and gets to take home 75% of that, or roughly $42,000.  As we mentioned above, the average household has roughly $133,000 of debt outstanding.  Assuming the average rate on that debt is 5% (which seems generous but stick with us) would imply $6,650 worth of interest payments per year, or roughly 16% of take home pay.

Unfortunately, a significant portion of consumer debt carries floating interest rates.  Therefore, in the most dire scenario, a 1% increase in rates will translate into an extra $1,330 of annual interest payments, $110 per month, and a roughly 3.2% reduction in discretionary personal income. 

So while the fed-induced treasury bubble has been fun for debt-thirsty Americans willing to take on any amount of leverage so long as they can afford the monthly payments, we suspect the unwind is going to be equally painful.