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.

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.

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...

Here's How Your State Ranks On Credit Card Debt Per Household

As parents all around the country wake up this morning and instantly regret adding $1,000"s of dollars to their credit cards over the holidays (at a 30% interest rate nonetheless) so that little Johnny could have the latest iPad, gaming console and sneakers, here is a list of the states where consumers have racked up the most revolving debt.

Ironically, when color coded based on political preference, with the notable exception of Alaska, Democratic-leaning states seem to carry higher credit card debt balances than conservative states.  Imagine that, conservatives expect their government to run budgets the way they run their own households.

Meanwhile, as MarketWatch points out, in the worst states it would take the average family over a year and a half to pay off their credit debt if they contributed 15% of their median income to debt repayment.  But who wants to pay down credit card debt anyway?  We can"t very well have economic growth if people are unwilling to borrow all the way up to the point that they can no longer afford the minimum payment...right, Janet?

According to ValuPenguin, millennials carry an average credit card balance of $5,800 while, shockingly, even those American"s past retirement age are carrying credit card balances over $6,000 well into their 70"s. 

And, of course, the more you make the more you borrow...because why not?

Meanwhile, Experian"s State of Credit 2016 report highlights the top/bottom 10 cities in the United States based on credit score.  Minnesota and Wisconsin absolutely dominate that the top 10 list while California, Texas and Louisiana account for 8 out of the 10 worst cities.

Oh well, at least little Johnny will love the new Xbox and sneakers for at least a week and it made for a great Facebook pic!

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.