Canadian Homeowners Take Out HELOCs To Fund Subprime Purchases

Authored by Steve Saretsky via VanCityCondoGuide.com,

The HELOC (Home Equity Line of Credit) has been a blessing and a curse for Canadian households. While it has helped spur house prices and simultaneously provided consumers the ability to tap into their new found equity, it has also crippled many Canadian households into a debt trap that seems insurmountable.

Between 2000 and 2010, HELOC balances soared from $35 billion to $186 billion, according to the Financial Consumer Agency of Canada, an average annual growth rate of 20%.

As of 2016, HELOC balances sit at $211 billion, a 500% increase since the year 2000. While also pushing Canadian household debt to incomes to record highs of 168%.

HELOC Debt in Canada

Scott Terrio, a debt consultant, says the situation is a full blown “extend and pretend” meaning borrowers are just continuously refinancing or taking on more and more debt in order to sustain their lifestyle. Canadians can extend their debt repayment terms and pretend to live a lifestyle they can’t otherwise obtain.

What the HELOC has also been able to do is help spur the private lending space which has ultimately supported rising house prices. Seth Daniels of JKD Capital, one of the most astute Canada-Watchers says theres a growing trend where “a homeowner acts as a sub-prime lender by drawing a HELOC at 3% interest only, and lends it to a subprime borrower at 8-12% for one year (interest only).”

This is something i’ve been hearing on an ongoing basis from mortgage brokers and lawyers who help facilitate these deals. Especially since mortgage lending conditions tightened, starting with OSFI’s first mortgage stress test back in November, 2016 which required high ratio borrowers (less than 20% down payment) to qualify for a mortgage at the borrowing rate plus 2%. So basically you’re getting qualified on what you can borrow at 5% even though you’re borrowing at 3%.

This strategy has been bulletproof, because, well, prices can only go up.

The lender makes a juicy return, and the borrower gets his house. The borrower then transitions into a traditional mortgage once his home equity rises after the one year expires.

This has created a situation where, as of September 2017, personal loans secured against residential real estate hit a record high $247 Billion.

Source: Better Dwelling via OSFI

Thanks to an endless supply of new loans (credit) and rising house prices, mortgage arrears rate continue to fall to rock bottom lows.

Source: CMHC

But as Seth Daniels remarked, “Up to a point, the greater the debt growth, the lower the arrears because as they say ‘a rolling loan gathers no loss’. In other words when debt growth is exploding people can find ways of avoiding default by rolling the loan, refinancing, selling the asset, or whatever. So, paradoxically, the default rate will seem to improve when the actual risk in the economy is exploding”.

With another mortgage stress test set to roll out January 1, 2018, this will likely push another swarm of borrowers into the private lending space. We’re already witnessing a huge end of the year push as buyers scramble to secure a home prior to further mortgage clamp downs.

The new mortgage stress test which previously only targeted high ratio borrowers (less than 20% downpayment), will now include low ratio borrowers (more than 20% downpayment) as well. This could be substantial, considering  85% to 90% of all mortgages in Toronto & Vancouver are low-ratio.
(American Readers: Canadians can only secure a mortgage rate for a maximum term of 5 years, meaning a rising interest rate environment is much more impactful)

It’s anticipated to eliminate some 12% of low ratio borrowers while simultaneously reducing borrowing power by 20%.

This could signal a final boom for the private lending space in Canada.

Vending Machines Are The Latest Threat To US Retailers

US retailers just can’t catch a break.

In a bid to undercut US-based brands, “fast fashion” purveyor Uniqlo announced this week that it will begin selling its clothes in vending machines, a common practice in Japan, where Uniqlo’s owner, Fast Retailing Co., is based. All told, the company plans to open 10 machines in and around New York City, Oakland and Houston, according to MarketWatch’s Ali Malito, who reported that brands are increasingly selling consumer goods like clothing out of vending machines as part of a “growing trend” as they “look for new ways to sell their goods" amid a flood of brick-and-mortar bankruptcies.

“There’s no hassle,” consumer shopping expert Andrea Woroch told Malito. “You get what you want.”

However, this latest wave of innovation in the retail space threatens to leave US firms flat-footed if the fail to quickly adapt, just like many now-dead companies who failed to anticipate the rise of Amazon.com and e-commerce more broadly.

In the US, vending machines are a $7 billion-a-year business, although sales have been flat in recent years, according to industry-research group IBISWorld, as consumers increasingly prefer healthier snacks and beverages than the potato chips and soda that consumers typically associate with vending-machine sales. According to Euromonitor data cited by MarketWatch, the US vending-machine market is closer to $5 billion a year in sales, the third-largest behind No. 2 Spain ($8 billion) and No. 1 Japan ($26 billion).

In recent years, vending machines have been popping up in the US that sell a range of nontraditional items, including guitar accessories, bike parts, Lego toys, caviar, pet food, umbrellas, socks, shoes, envelopes, cosmetics, gold and even – in the states where it has been legalized – marijuana, according to MarketWatch.

“Food and beverages still make up most vending machine sales — each accounting for roughly one-third of sales — while movies and games made up 29% of the industry, followed by 6% for other products including electronics, magazines, toys, condoms, first-aid products and cosmetics, IBISWorld found. Still, food vending machines no longer just offer Pringles and pretzels. Sprinkles, a bakery in New York, has a “Cupcake ATM” for passersby in the mood for a treat, and another bakery, in Cedar Creek, Texas, has a vending machine for its full-sized pecan pies.”

A “vending machine” for luxury cars opened earlier this year in Singapore. The “machine” is a revamped office building that allows wealthy collectors to pay in cash and drive off in their new car with minimal hassle. Luxury goods brands appear to be seizing on the vending-machine model more quickly than their downmarket peers, as MarketWatch explains…

“Champagne company Moët and Chandon also has vending machines, which hold 320 mini-bottles of its champagne. The first such machine launched in London last year and they are now available in Las Vegas and New Orleans. Companies even sell cars through vending machines - there’s already one in Singapore automotive division of Alibaba Group-owned shopping site Tmall hopes to bring one to China — not to be confused with vending machines in cars, which Uber has introduced in partnership with tech startup Cargo.”

As a gathering wave of brick-and-mortar closures and bankruptcies force brands to innovate, low-cost vending machines are looking increasingly attractive. However, Uniqlo must still find a way to surmount customer-service obstacles like allowing customers to try on clothes before buying, and enabling them to easily return their purchases.

“Because it’s cheaper for companies to sell from a machine instead of paying for rent and employees, Woroch said the variety of machines will keep growing. But they aren’t always the best option for shopping. Using them takes away most of the customer service element, since there’s no one to ask for help in sizing and product information, and no easy way to try or return the item back to the vending machine, Woroch said. And even with online shopping becoming more of a go-to option for consumers, shoppers still want that extra help, which is why so many more companies have chat boxes, she added.”

As we recently reported, retail bankruptcies surged 110% during the first half of 2017, accounting for some $6 billion in debt, even as the overall high-yield default rate tumbled to 1.9% in the same period from 2.2% at the end of June as $4.7 billion of defaulted debt, mostly in the energy sector, rolled out of the default universe. Overall high-yield default rate tumbled to 1.9% in the same period from 2.2% at the end of June as $4.7 billion of defaulted debt - mostly in the energy sector - rolled out of the default universe.

The Amazon Effect: Retail Bankruptcies Surge 110% In First Half Of The Year

As Amazon flirts with a $500 billion market cap, letting Jeff Bezos try on the title of world"s richest man on for size if only for a few hours, for Amazon"s competitors it"s "everything must go" day everyday, as the bad news in the retail sector continue to pile up with the latest Fitch report that the default rate for distressed retailers spiked again in July.

According to the rating agency, the trailing 12-month high-yield default rate among U.S. retailers rose to 2.9% in mid-July from 1.8% at the end of June, after J. Crew completed a $566 million distressed-debt exchange. Meanwhile, with the shale sector flooded with Wall Street"s easy money, the overall high-yield default rate tumbled to 1.9% in the same period from 2.2% at the end of June as $4.7 billion of defaulted debt - mostly in the energy sector - rolled out of the default universe.

In a note, Fitch levfin sr. director Eric Rosenthal, said that “even with energy prices languishing in the mid $40s, a likely iHeart bankruptcy and retail remaining the sector of concern, the broader default environment remains benign."

He"s right: after the energy sector dominated bankruptcies in the first half of 2016, accounting for 21% of Chapter 11 cases, in H1 2017 the worst two sectors for bankruptcies are financials and consumer discretionary.

And if recent trends are an indication, the latter will only get worse as Fitch expects Claire’s, Sears Holdings and Nine West all to default by the end of the year, pushing the default rate to 9%. "The timing on Sears and Claire’s is more uncertain, and our retail forecast would end the year at 5% absent these filings," Rosenthal wrote.

Putting the retail sector woes in context, Reorg First Day has calculated that retail bankruptcies soared 110% in the first half from the year-earlier period, accounting for $6 billion in debt.

The list includes name brands such as Gymboree, Payless, rue 21 and the Limited, all of which cited the Amazon affect as a contributor to their downfall.

“Many retailers have echoed the familiar cries of those that filed before them—the proliferation of online shopping, rapidly deteriorating brick-and-mortar retail, the rise of fast fashion, hefty lease obligations and shifting consumer preferences,” Reorg First Day said in a midyear review.

While it is far from empirically, and certainly scientifically established, every incremental retail bankruptcy should add approximately $5-10 billion to AMZN"s market cap, further cementing Jeff Bezos as the world"s richest monopolist man.

Carmageddon Crashes into “the Recovery” Right on Schedule — EXACTLY as Predicted Here

Carmageddon, as Wolf Richter has called it, is hitting the US economy exactly as I said a year and a half ago would start to happen at the very end of 2016 or the start of 2017. Measured year-on-year, auto sales have declined every month of 2017, and are now starting to cause the financial wreckage that I said we would experience in what will become a demolition derby for US auto manufacturers.

“A stretched auto consumer, falling used [vehicle] prices, and technological obsolescence of current cars are ingredients for an unprecedented buyer’s strike,” wrote Morgan Stanley’s auto analyst Adam Jonas in a note to clients. (Wolf Street)

Stanley now foresees a “multiyear cyclical decline,” along with a declining “willingness of financial institutions to lend as aggressively as in the past.”

After an eight-year boom, the industry appears “to be hitting a point of diminishing returns where the tactics required to attract the incremental consumer may be putting even more pressure on the second-hand market, leading to adverse conditions for selling new vehicles….” not even record incentives, reaching $14,000 for some truck models, have much impact. Those are the “diminishing returns” – when you throw gobs of money at a problem and it doesn’t have much impact. Lenders, particularly the captives, stepped forward, making loans with very long terms, low and often subsidized interest rates (“0% financing”), sky-high loan-to-value ratios, and leases that gambled on very high residual values that have now gone up in smoke as used vehicle prices are heading south.

How many times have readers here heard me stress the economic Law of Diminishing Returns that economists and banksters and CEOs are almost universally ignoring. This exact scenario, you may recall, is what I said would happen this year, only I said it in January, 2016, year before it began:

Auto-traders are auto-traitors

I’m speaking here of the financiers and the manufacturers, not the buyers. Auto sales are at a record high (up 15% in 2015), and some look to that as evidence that the US economy is strong. I would say, instead, it is the exception that proves the rule. It is one more part of the problem because that accounting is all baloney, and baloney is why most of the world’s economic experts don’t see any of this coming. They believe their own baloney.

You have to consider what factors have taken auto sales to these supposedly soaring heights. In part, it’s consumer confidence, which is a positive tail wind for the economy; but terms of credit on automobiles have been extended out to all-time extremes, too, of seven years on a highly depreciable asset. Down payments have, as they were just before the Great Recession, been minimized, as has interest. Most of all, most of these sales are not sales at all. The industry now leases far more cars than it sells.

You have to wonder why so many economists are blind to how significant all of that is and to what it means. So blind, in fact, that they point to auto sales as an indicator of a strong economy when it is the same mess we saw in the Great Recession. Apparently economists are incapable of learning anything.So, the biggest scare here is how blind it proves the experts are who guide the economy.

Has anyone forgotten what supported auto sales in the year before the Great Recession? Zero interest, zero down, and zero payments for a year. At the time, I was asking, “What’s their end game? Where do they go from here now that they’ve spent the year giving away one-year leases because people can return all these cars at no loss?

What we see now is that the automotive industry has doubled down on desperation by adding to that original mess longer-term loans and particularly by moving toward leases and calling them the new auto sales. As recently as 2010 fewer than one in ten auto loans exceeded a six-year term. Now, that is the average loan length.

It’s dumbfounding to me that people are stupid enough to site auto sales as evidence of a healthy economy when they are built on such precarious terms and are mostly not even true sales. Just as in housing, we have switched from being a nation of auto owners to auto renters. As with housing, I expect a collapse of auto sales because it is built on a rickety foundation, but it will be a trailing trend because it depends on a weakening of the consumer base as the economy slides back into recession. However, it will increase the speed and depth of the economic collapse as it joins the forces of the fall.

Auto sales may not join the parade of panic until late in the year or 2017; but expect automakers within a year of so to end up right back where they were during the worst of the Great Recession … with less hope of a bailout. Oh, my goodness, the sheer stupidity!

…Does anyone remember 2008 when automakers went bankrupt-or-bailout? They’re betraying the bailouts we gave them by setting up disaster all over again.

…Total car debt in the US right now is 30% higher than it was at its last peak right before … 2008! It has risen from about 600 billion dollars in outstanding debt to over a trillion dollars. Does that really leave any headroom for market expansion? Are you seeing a pattern here?

It’s the same thing, but an order of magnitude greater, and anyone who is not steeped in economic denial could have and should have seen this coming. I knew it was coming and how long it would take because it is the same pattern I saw leading into the Great Recession. (I choose to learn patterns from history, but our leaders, including CEOs, do not.) As I’ve said before, we (as a nation) have learned NOTHING.

The Great “Recovery” is all about repeating the mistakes that created the Great Recession in order to recover the glory bubble days; only we are repeating those mistakes at a vastly higher magnitude because the Law of Diminishing Returns has reached the hockey-stick side of the curve. That is as true for the housing market and all of the Federal Reserve’s plans as it is for the auto industry and the consumer banks that operate in that industry.

The fallout from Carmageddon on banks and investors as well as automakers

Derivatives (remember those dangerously cloaked things?) made up of auto loans made to people with good credit have already reached their highest default rate since 2008 when automakers wound up having to be bailed out or barely escaped that kind of perverse salvation plan. JPMorgan Chase & Co. is now tightening up on any more auto loans.

And then there are the subprime junkers:

Institutional investors that manage other people’s money grabbed subprime auto-loan backed securities because of their slightly higher yields. These bonds are backed by subprime auto loans that have been sliced and diced and repackaged and stamped with high credit ratings. But those issued in 2015 may end up the worst performing ever in the history of auto-loan securitizations, Fitch warned.

 

And then there are those issued in 2016. They haven’t had time to curdle.

 

The 2015 vintage that Fitch rates is now experiencing cumulative net losses projected to reach 15%, exceeding the peak loss rates during the Financial Crisis. (Wolf Street)

According to Bloomberg,

Subprime auto bonds issued in 2015 are by one key measure on track to become the worst performing in the history of car-loan securitization … , which is higher even than for bonds in … 2007….  The 2015 vintage has been prone to high loss severity from a weaker wholesale market and little-to-no equity in loan contracts at default due to extended-term lending.

Gee, who could have seen that coming? Oh, yeah, me … clear back in 2015:

Auto loans and student loans are a leaning tower of debt. Auto sales have peaked only as a result of a huge extension of looser, loser credit where loan terms are now up to seven years long, and interest is low or non-existent as are down payments. The last time we saw such desperate financing measures in the auto industry was just before the Great Recession, and we all know what happened to the auto industry then. We also know what happened to the housing industry when it peaked because of this kind of looser credit. We’ve learned nothing and have repeated the problem … on steroids. So, another crash is coming. (“Epocalypse Soon“)

And even earlier than that when I wrote …

Another support given was that “sales of autos are still rising.” Wow! Only because of SEVEN-YEAR auto loans, zero-interest loans, and the fact that auto dealers are now counting leases as sales!

 

That’s the same easy-credit bubble that was created in housing! How can people not see that it is exactly the same thing — only in cars?

…Moreover, how can people not see that this was the same nonsense that got automobile manufacturers in trouble during the last economic crash? It’s why they went down at the same time housing went down. (“Sometimes When I Read Economists My Brain Hurts“)

Because of these extended terms on a rapidly depreciating asset, as I warned way back when the practice began, negative equity now averages a little higher than $5,000, which is the worst ever, and which means banks effectively have no collateral.

As Wolf points out, that negative equity now gets rolled over into a new car loan when the old vehicle is traded in, making the new loans worse than ever. So, the cause of bad debt spreads like cancer. (We see it happening, but we still allow it because we’re dumb like that. At least, those who are bankers and regulators are because they learned nothing.) Vehicle trade-in values have reached their lowest levels since 2010. That kind of date should mean something by association.

Speaking of the Great Recession, do you remember how some housing lenders made the subprime mess as bad as it was by not checking on the credit data of those they were making loans to? Those loans got batched into the derivatives that went bad. Well, the nation’s largest sub-prime auto lender, Santander Consumer USA, has only been verifying 8% of its loans! (Again, we learned nothing!)

In other collateral damage this week, General Motors announced an extended closure of two of its car manufacturing plants. This is partly due to drivers switching to SUVs, but the increase in SUV sales is less than the decline in car sales. Multi-industry factory output across the US is down for the second time in three months, and that number, too, is driven largely by the crash in auto production.

Carmageddon has been building insidiously each month since the start of the year, but the impact of decline is now waking up banks, manufacturers and investors to the significance of this event, which I said back in January of 2016 would be just one part of a massive and slowly unfolding “Epocalypse.”

As the impact is summarized on Wolf Street (linked to above),

Over the longer term, Jonas gets outright bearish – and with good reason. He expects a slump that will last years. For 2018, he cut his previous estimate of 18.9 million down to 16.4 million, which may still be high. And for 2019 and 2020, he slashed his estimate to 15 million sales.

And how bearish for auto sales is this?

But he notes that to maintain sales even at that low level, the government would have to step in and subsidize in some way new car purchases.

There we are! We are right back to government bailouts of the auto industry in one form or another, even to maintain declining sales.

You see, the warnings given during the Great Recession were completely sure: if you bail the failures out once, you create “moral hazard,” which causes the greedy to double down on their stupid risks. They learned nothing. Forget the idea that CEOs are smart … unless by “smart” you mean smart at con games. If you cannot learn from an event as obvious and global as the Great Recession, you cannot learn from anything … not even to save your soul from its own corruption.

Why is it important that I point out that I predicted these things?

Because if someone can show these events are predictable — in how they will fall, how hard they will fall and even WHEN they will fall, then it becomes inexcusable that we went down this path all over again! The idiots who cause the problem can no longer say, “Well, we cannot be expected to have seen something like this coming.” Yes, they can be and should be expected to have seen it coming. It is inexcusable that they did not! So, let’s cut off that path of escape from responsibility for the wreckage that is coming due to their uninhibited greed and foolhardy risk taking.

It is also important because it is about destroying the economic denial that is rampant throughout this nation and that will destroy the nation entirely if it continues.

Finally, it is important because you might just stop to think that, if someone predicted the catastrophe that is unfolding right now a year before the first actual signs of failure began, then you might want to pay attention to rest of what he was predicting. And I beat that drum again and again because so few people are listening, and it is far past time that they did. It is time for this nation to wake up to its own economic stupidity.

Carmageddon was a completely foreseeable and, so, completely avoidable pile-up!

Is Another Spanish Bank About To Bite The Dust?

Authored by Don Quijones via WolfStreet.com, 

Stockholders and junior bondholders fear another “bail-in.”

After its most tumultuous week since the bailout days of 2012, Spain’s banking system is gripped by a climate of fear, uncertainty and distrust. Rather than allaying investor nerves, the shotgun bail-in and sale of Banco Popular to Santander on Tuesday has merely intensified them. For the first time since the Global Financial Crisis, shareholders and subordinate bondholders of a failing Spanish bank were not bailed out by taxpayers; they took risks in order to make a buck, and they bore the consequences. That’s how it should be. But bank investors don’t like not getting bailed out.

Now they’re worrying it could happen again. As Popular’s final days showed, once confidence and trust in a bank vanishes, it’s almost impossible to restore them. The fear has now spread to Spain’s eighth largest lender, Liberbank, a mini-Bankia that was spawned in 2011 from the forced marriage of three failed cajas (savings banks), Cajastur, Caja de Extremadura and Caja Cantabria.

This creature’s shares were sold to the public in May 2013 at an IPO price of €0.40. By April 2014, they were trading above €2, a massive 400% gain. But by April 2015, shares started sinking. By May 2017, they were trading at around €1.20.

But since the bail-in of Popular, Liberbank’s shares have seriously crashed as panicked investors fled. Scenting fresh blood, short sellers were piling in. On Friday alone, shares plunged another 17%. At one point, they were down 38% before bouncing at the close of trading, much of it driven by the bank’s own share buybacks:

In the last three weeks a whole year’s worth of steadily rising gains on the stock market have been completely wiped out. The main causes of concern are the bank’s high risk profile and low coverage rate. By the close of the first quarter of 2017, Liberbank’s default rate had reached 13%, over three percentage points higher than the national average (9.8%), while its unproductive asset coverage rate was just 42.1%, compared to 47% for Banco Sabadell, 48% for Bankia, 50% for CaixaBank and 55% for Unicaja.

Worse still, the vast bulk of the bank’s unproductive assets are real estate investments. After Popular, it is the Spanish entity with most exposure to toxic real estate assets, according to the financial daily El Confidencial — a remarkable feat given the bank already had the lion’s share of its impaired real estate assets transferred onto the balance sheets of Spain’s “bad bank,” Sareb.

It’s not just the bank’s shares that are feeling the pressure. With the memory of what happened to holders of Popular’s junior, subordinate and convertible debt still fresh in their mind, investors are divesting their exposure to Liberbank’s subordinate debt. On Friday alone the bank’s most recent issuance, dating back to March 2017, generated losses of 9.8%.

Liberbank’s management has responded the only way it can — with a slew of denials. The bank is nothing like Popular, it says. It is solidly solvent and its deposits are safe, which is probably true: even the deposits of Popular’s customers are now safe despite the fact the bank had hemmorhaged €18 billion of deposits in the last few weeks of its truncated existence. It was this frantic run on deposits that ultimately sealed its fate, prompting the ECB to conclude that the bank was “failing or likely to fail.”

Banco Popular’s demise is a stark reminder that Europe’s banking woes are far from resolved, despite the trillions of euros thrown at them. “The message the market is sending is that you have to buy solvent banks and stay away from those that pose high risks,” said Rafael Alonso, an analyst at Bankinter, one of Spain’s more solvent banks.

Another Spanish bank that could be considered to pose high risks is Unicaja, the product of another merger of failed cajas that is (or at least was) scheduled to launch its IPO some time in June or July. As things currently stand, the timing could not be worse. The greater the uncertainty over Liberbank’s future, the lower the projected valuation of Unicaja’s IPO falls. Before Popular’s forced bail-in and acquisition, the Unicaja was valued at around €2.3 billion; now, just days later, it’s valued at less than €1.9 billion. If the trend continues, the IPO will almost certainly be shelved.

As for Liberbank, if things don’t improve soon and investor nerves aren’t steadied, it too could find itself on the ECB’s Single Resolution Board’s chopping board. Perhaps it too will be sold for €1 to a much larger bank that, like Santander, is able to raise billions of euros of new funds at the drop of a hat, with other too-big-to-fail banks like UBS and Citibank more than happy to lend a helping hand. And just like that, another smaller bank would bite the dust while the biggest banks get bigger and ever more dominating in the market.

Many Banco Popular investors wiped out. Taxpayers off the hook. What it means for Italy. Read…  “Bail-In” Era for Europe’s Banking Crisis Begins

We Now Know "Who Hit The Brakes" As Loan Creation Crashes To Six Year Low

The wheels are falling off the US bank loan market.

After we first showed in early March the steep drop in bank loan creation for both Commercial and Industrial, auto and total loans - all traditionally leading indicators to economic contraction and recession as business and consumers halt spending, even with borrowed money - numerous other analysts and pundits have attempted to explain, and justify why one should not be particularly concerned about this tumbling indicator. Most notable among them Goldman, who in late March "explained" that there was nothing ominous about the crash in loan creation, and instead it was just a function of a base effect, and a shift from loan to corporate bond issuance.

Two months later we can confirm that not only was Goldman wrong, but so are all the Pollyannas who assert there is nothing troubling about the ongoing collapse in loan creation.

According to the latest Fed data, the all-important C&I loan growth contraction has not only continued, but over the past two months, another 50% has been chopped off, and what in early March was a 4.0% annual growth is now barely positive, down to just 2.0%, and set to turn negative in just a few weeks. This was the lowest growth rate since May 2011, right around the time the Fed was about to launch QE2.

At the same time, total loan growth has likewise continued to decline, and as of the second week of May was down to 3.8%, the weakest overall loan creation in three years.

Another loan category that has seen a dramatic slowdown since last September, when Ford"s CEO aptly predicted that "sales have reached a plateau."  Since then auto loan growth has been slashed by more than 50% and at this runrate, is set to turn negative some time in late 2017.  Needless to say, that would wreak even further havoc on the US car market.

For a while, despite numerous attempts at explanation, there was no definitive theory why this dramatic slowdown was taking place. It even prompted the WSJ to inquire "who hit the brakes?"

Well, after the latest Fed Senior Loan Officer Survey, we may have the answer.

First, recall that in late April we showed another very troubling trend: consumer credit card default rate as tracked by S&P/Experian Bankcard had surged to the highest level since June 2013, suggesting that contrary to reports otherwise, the US consumer is increasingly unwell.

A quick look at the latest Fed Senior Loan officer survey revealed even more disturbing trends. According to the report, "banks reported tightening most credit policies on Commercial Real Estate loans over the past year.... On balance, banks reported weaker demand for CRE loans in the first quarter." Even more troubling was the continued drop in demand for C&I loans among small, medium and large corporations, with "inquiries for C&I lines of credit remained basically unchanged" staying at a modestly depressed rate.

This stark admission that in addition to declining bank supply due to tighter standard (i.e., worries about further losses), there was less demand by businesses and consumers for loans, has explained once and for all the ongoing collapse in commercial bank loan creation, both total, C&I and auto. Of the two, the declining demand for loans businesses, is by far the most concerning aspect of an economy that is supposedly growing, and where companies should be willing to take out new credit to fund expansion (instead of merely issuing bonds to buyback their stock).

Digging deeper into the Fed report confirmed the worst-case scenario: the collapse in loan growth was almost entirely due to a sharp, recent consumer revulsion toward credit, with reduced level of consumer card and auto loan demand in the quarter. The decline took place despite "visibly softer" underwriting standards for cards which surprised some analysts as not creating incremental demand;

And while C&I loans are tumbling, demand for credit cards is now running at the lowest level in the 5 years the survey has provided credit- card-only data for consumer demand.

With all that, we can now close the book on the WSJ"s previously unanswered question of "who hit the breaks?" The answer: the US consumer, the driver behind 70% of US GDP, officially tapped out.

In fact, it was almost as if US consumers were hit by a perfect storm of adverse events in late 2016 and early 2017, just as GDP was on the verge of its first pre-recessionary contraction in years, and just as the S&P rose to new all time highs to distract from what is emerging as an imminent US recession.

Here"s the bottom line: unless there is a sharp rebound in loan growth in the next 3-6 months - whether due to greater demand or easier supply - this most accurate of leading economic indicators guarantees that a recession is now inevitable. How accurate: every single time C&I loan peaked, a US recession follow. We doubt this time will be different.

These Eleven Retailers Will File For Bankruptcy Next, According To Fitch

One month ago, we presented a stunning fact from Credit Suisse: barely a quarter into 2017, [annualized] year-to-date retail store closings have already surpassed those of 2008.

According to the Swiss bank"s calculations, on a unit basis, approximately 2,880 store closings were announced YTD, more than twice as many closings as the 1,153 announced during the same period last year. Historically, roughly 60% of store closure announcements occur in the first five months of the year. By extrapolating the year-to-date announcements, CS estimates that there could be more than 8,640 store closings this year, which will be higher than the historical 2008 peak of approximately 6,200 store closings, which suggests that for brick-and-mortar stores stores the current transition period is far worse than the depth of the credit crisis depression.

Another striking fact: on a square footage basis, approximately 49 million square feet of retail space has closed YTD. Should this pace persist by the end of the year, total square footage reductions could reach 147M square feet - or just over 5 square miles - another all time high, and surpassing the historical peak of 115M in 2001.

Furthermore, according to a recent WSJ analysis, at least 10 retailers, including Payless ShoeSource, hhgregg, The Limited, RadioShack, BCBG, Wet Seal, Gormans, Eastern Outfitters, and Gander Mountain had filed for bankruptcy protection through the end of April, which compares with nine retailers that declared bankruptcy for all of 2016. All of the companies in bankruptcy have announced plans to shutter some if not most of their stores.

Then after taking a brief one month hiatus retailer bankruptcies resumed last Monday, when struggling teen clothing retailer Rue21 became the last to filed a prepackaged Chapter 11 petition in Pennsylvania bankruptcy court, listing both prepetition assets and liabilities between $1 and $10 billion.

Rue21’s bankruptcy filing lifted Fitch’s U.S. retail LTM institutional leveraged loan default rate to 1.7% from 0.9%. An impending bankruptcy from Gymboree would further lift the retail TTM to 2.7%, Fitch said. Unfortunately for the US retail industry, and despite such upbeat pieces as "Why the Rout in Retail Shouldn"t Be a Big Worry for U.S. Economy" written by Bloomberg"s in-house US economic cheerleader, the rating agency expects a flood of future defaults, and forecasts the retail loan default rate at 9% on roughly $6 billion of defaults, though it concedes that "the fate of Sears Holdings and the resolution of J. Crew Group’s bond exchange could materially alter the projection."

It also noted that the high yield retail default rate is also expected to finish 2017 at 9%, with more than $4 billion of likely defaults.

More improtantly, Fitch has also revised its "retail concern list" which compiles issuers with a significant risk of default within the next 12 months, and which now lists nite retailers, up from eight the last time we showed the list in April, including:

• Sears Holdings


• Gymboree


• Nine West Holdings


• 99 Cents Only Stores


• True Religion Apparel


• Charlotte Russe


• Charming Charlie


• NYDJ Apparel


• Vince.A


• Claire’s Stores


• Chinos Intermediate Holdings (J Crew Group)

We expect his list to grow over the coming months, as some names fail only to be replaced with even more near-death retailers in a country where as the Fed reported earlier, 23% of Americans cant pay their monthly bils while 44% of Americans have less than $400 in cash.

Meanwhile, Jeff Bezos is wondering how he is still not the world"s richest man yet. As a reminder, the market cap of Amazon is more than 8 times the value of the entire US department store index...

 

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.

Clothing Retailer Rue21 Files For Bankruptcy, Many More On Deck

This time Fitch was right. One month ago the rating agency listed 8 retail names that were most likely to file for bankruptcy next, just over a month later 1 out of the 8 was down, when teen clothing retailer Rue21 filed a prepackaged bankruptcy on Monday night in Pennsylvania bankruptcy court.

In its bankruptcy petition, the company which retained Kirkland & Ellis as legal advisor, Rothschild as financial advisor, and Berkeley Research as its restructuring advisor, listed both assets and liabilities in the range of $1 to $10 billion.

The restructuring process, during which the company will operate as normal, will lead to company"s "transformation into a more focused and highly performing retailer" the company announced in a press release, and added that as part of its restructuring process, it had "entered into a Restructuring Support Agreement (RSA) with certain of its stakeholders that confirms the support of the Debtors" key constituents for the Debtors" restructuring process and contemplates, among other things, an emergence from chapter 11 proceedings in the fall of 2017 with a significantly deleveraged balance sheet.  In particular, lenders holding 96.8% of the Company"s secured term loan, bondholders representing 60.2% of the Company"s issued and outstanding unsecured notes, and the Company"s majority shareholder each executed the Restructuring Support Agreement."

The Company has also reached agreements, subject to the approval of the Court, to obtain up to $125 million in ABL debtor-in-possession financing from its existing ABL lenders and up to $50 million in new money term loan debtor-in-possession financing from a subset of its existing term loan lenders.  This financing is intended to provide the Company with the liquidity necessary to support its ongoing business operations during the financial restructuring process

Melanie Cox, Chief Executive Officer of rue21, said "These actions are being undertaken with the goal of strengthening the Company"s balance sheet, achieving a more efficient cost structure, and concentrating resources on a tighter retail footprint in order to pave the best path forward for rue21. Even in a challenging environment, we are fortunate that rue21 has highly relevant brands, an enthusiastic and loyal customer base, and hundreds of highly performing stores. The agreement with our lenders represents their confidence in rue21"s future success even at a time of significant retail industry change. Looking ahead, I am confident that the outcome of this process will be a stronger and more sustainable rue21 for our customers, vendors and business partners."

The company also noted that last month it began the process of closing approximately 400 underperforming stores in its 1,179 store fleet in order to streamline operations, however it warned that it "may evaluate additional store closings as it continues to manage its real estate lease portfolio."

Rue21’s bankruptcy filing lifts Fitch’s U.S. retail trailing 12-month institutional leveraged loan default rate to 1.7% from 0.9%. An impending bankruptcy from Gymboree would further lift the retail TTM to 2.7%, Fitch said. The rating agency expects a flood of future defaults, and forecasts the retail loan default rate at 9% on roughly $6 billion of defaults, though it concedes that "the fate of Sears Holdings and the resolution of J. Crew Group’s bond exchange could materially alter the projection."

It also noted that the high yield retail default rate is also expected to finish 2017 at 9%, with more than $4 billion of likely defaults

Additional Fitch revised its retail concern list, which now lists eleven retailers on Fitch’s loans and/or bonds of concern lists, which compile issuers with a significant risk of default within the next 12 months, including:

• Sears Holdings


• Gymboree


• Nine West Holdings


• 99 Cents Only Stores


• True Religion Apparel


• Charlotte Russe


• Charming Charlie


• NYDJ Apparel


• Vince.A


• Claire’s Stores


• Chinos Intermediate Holdings (J Crew Group)

Finally putting the 2017 announced store closings in context, here is a chart we showed one month ago. We expect many more names will soon be added to this running total.

The Other Shoe Drops: Prime Auto Loans Losses Surge As Recoveries Tumble

When we looked at subprime auto delinquencies most recently, we found some troubling trends: first, in February, we showed that 61+ day delinquencies in General Motors" subprime securitization book would support a rather bleak thesis for future auto sales, and specifically the demand side of the equation, with January 2017 delinquency rates soaring to the highest levels since late 2009/early 2010. 

Ironically, this hasn"t stopped lenders from providing financing, and according to Morgan Stanley since 2010, the share of Subprime Auto ABS origination that has come from deep subprime deals has increased from 5.1% to 32.5%, suggesting that yield-starved buyside will put "other people"s money" into anything as long as it provides a slightly higher yield.

Meanwhile, the subprime shock has already impacted the broader market, observed with the latest monthly auto sales data which declined four month in a row heading into May. An even bleaker picture of the subprime market emerged a month later when looking at the latest securitization analysis from Morgan Stanley which revealed that 60+ day delinquencies at 266 subprime auto ABS deals were surging - despite low unemployment, high consumer confidence and debt-to-income ratios at 30-year lows - back to "great recession" levels. Meanwhile, loss severities were also shooting higher just as used car prices were sliding.

 

In part, this tied in with the overnight look at the "flood of off-lease vehicles", according to which by the end of 2019, an estimated 12 million low-mileage vehicles are coming off leases inked during a 2014-2016 spurt in new auto sales, which is set to put even more pressure on used (and new) car prices for the foreseeable future.

As Reuters noted, a computer search for available used vehicles within 150 miles of Reel revealed an eye-popping figure: 668 Escapes. That"s enough to put more than 40 percent of the inhabitants of this small northeastern Ohio town, population 1,600, into the popular crossover. A search for the Chevrolet Equinox, a comparable crossover, showed 461 available.

"The automakers have flooded the market," said Reel, owner of Reel’s Auto in Orwell, Ohio, about 40 miles east of Cleveland.

The above trends validate a recent bearish Morgan Stanley analysis, which forecast that the plunge in used car prices is just getting started, and in a bear case, the bank sees used car prices dropping by up to 50% over the next 5 years.

 

* * *

However, in an even more troubling development for US consumers, it now appears that the other shoe for the US auto market has finally also dropped, and according to analyses by both Morgan Stanley and S&P, losses on prime auto loans are also surging.

In the latest note by Morgan Stanley"s Jeen Ng, the analyst reports that "fundamental performance deterioration has not been confined to Subprime. Both 60+ day delinquencies and default rates in Prime ABS pools have nearly doubled from their post-crisis lows."

A slightly better picture - at least according to MS data - emerges in terms of loss severities. Still, while subprime losses are far worse, the deterioration among prime loans is unmistakable: compared to peak levels, 60+ day delinquencies in Prime auto loan pools are roughly 65% of the way back, whereas Subprime pools are close to 95% of their peak levels. On the default rate side, the deterioration is somewhat more subdued, with Subprime over 80% of the way back to prior peaks while Prime has yet to reach the 45% mark.

One troubling observation, as confirmed in the recent Fed Senior Loan Officers Survey is that credit standards have continued to ease: as in Subprime, some of the ongoing Prime deterioration can be attributed to a relaxing of credit standards.

Aggregate credit scores have decreased by about 5 points, which while easier is not even half as much as the 10+ point deterioration in Subprime. The same is true for longer origination terms. Most Prime issuers have extended loan terms by 3-4 months over the past 5 years. In Subprime, extension in most cases has been longer than 10 months. These easier standards can help explain both why delinquencies and defaults are higher, according to Ng. Also, keep in mind, there is a limit as to how far Prime issuers can expand their credit box in the form of lower credit scores before the deals become Subprime.

Some more observations from Morgan Stanley, which finds a particular deterioration in recent loan issuance at Huyndai and Mercedes:

As auto lenders expand their credit box to weaker credit borrowers, we should expect to see poorer credit performance among more recent deals relative to the more seasoned ones.

Across the OEM originators above, we see a very consistent shift in lending standards over time - marginally longer loan terms, higher credit scores and lower used car composition. Overall, the longer loan terms and higher credit scores have offsetting effects on fundamental performance. If we look at the 60+ delinquencies and 3-month CDR curves by vintage, we don"t necessarily observe performance  deterioration over time, and for some issuers we even see relative outperformance among recent deals. However, we do see higher severities among recent vintages, which we can at least partly attribute to the decline in used car values.

HART (Hyundai) and MBART (Mercedes Benz) serve as exceptions to the above, with a higher % of used vehicles and FICO migration of less than +10 points over the last 7 years. They are also the two shelves which show the most pronounced performance shift. TAOT (Toyota) also extended their credit score by less than 10 points, but their change in origination loan terms has been minimal and they have a lower  composition of used vehicles over time.

Additionally, in terms of loss severities, the bank finds that all originator types appear to be trending higher in similar fashion, with non-bank originators printing the lowest recovery values. OEM originators overtook bank originators to see the highest recovery values last year.

* * *

In a separate, and even more downbeat report, S&P Global Ratings analyst Ann Matin noted that losses in bonds tied to "prime auto loans have surged surged in recent months from a year ago, hurt by falling recoveries" and notes that prime net losses rose to 0.73% in February from 0.57% in same month last year. According to S&P, bonds from some issuers that have become a larger share of the index, including Mechanics Bank’s California Republic and TCF Financial Corp., and both are contributing to those higher losses.  Additionally, the rating agency referred to the abovementioned loan losses at Huyndai, stating that “we’ve increased our expected cumulative net loss levels for certain issuers, including Hyundai’s most recent transaction, HART 2017-A."

Margin also wrote that prime asset-backed deals issued in 2015 seem to be performing worse, comparatively, than those sold between 2010 and 2014, and the deterioration in loans made to strong credit borrowers has forced S&P to revise its net loss expectations for various bonds.

* * *

To summarize: subprime loan losses have been surging alongside loss severities (with the buyside happy to soak up any and all issuance, regardless of underlying fundamentals), as recoveries slide, and in recent months this deterioration has finally shifted over to prime loans. Meanwhile, used car prices are tumbling, while new car sales have declined for 4 consecutive months as auto loan demand among tapped out consumers has tumbled. Meanwhile, millions of used cars are about to hit the market as they come off lease, which in turn will further pressure used car prices and new car sales.

So what happens next?  Here, we"ll repeat what we concluded last night:

Unstable used car prices will almost certainly reduce OEM reliance on leases as the implied 3-year depreciation (or residual values, if you prefer) will make them all but completely uneconomical: remember, Americans only care about that monthly payment.  Meanwhile, the relative value between used and new cars will tilt heavily in favor of the used market.  Thankfully Americans will still be able to buy that Mercedes they require to get back and forth from their minimum wage jobs, while maintaining a monthly payment of $500 or less, but it will just have to have 30,000 miles on it.

Of course, the OEMs of the world won"t admit that their game is over until it"s way too late.  So, they"ll keep right on producing new cars to cover a 17-18mm SAAR environment up until the point they face an outright revolt from their dealer networks.  At that point, however, dealer inventories will be so high that Detroit will be forced to shutdown for months on end while new car prices are slashed to reduce the massive inventory glut.  Tanking new car prices will put even more pressure on used car prices which will mark the beginning of the death spiral that will result in a new round of inevitable auto bankruptcies, catalyzing the next economic contraction... assuming one hadn"t started already.

Fed Reports Unexpected Collapse In Credit Card, Auto Loan Demand

Two weeks after we reported that the consumer credit card default rate as tracked by S&P/Experian Bankcard had surged to the highest level since June 2013...

... we were looking forward to the latest Fed Senior Loan officer survey for more details about changing loan dynamics within US society.

What the report revealed was troubling: while on the surface, the Loan Officer Survey characterized loans to businesses as "basically unchanged" from the previous survey, it did remark that standards for commercial real estate (CRE) loans had tightened.

According to the report, "banks reported tightening most credit policies on Commercial Real Estate loans over the past year.... On balance, banks reported weaker demand for CRE loans in the first quarter."

More concering was the continued drop in demand for C&I loans among small, medium and large corporations, with "inquiries for C&I lines of credit remained basically unchanged" staying at a modestly depressed rate.

This helps explain, once and for all, the recent collapse in Y/Y commercial bank loan creation, both total and C&I, and indicated that contrary to Goldman"s take, the steep drop has nothing to do with calendarization or a base effect, and everything to do with declining demand for the product among America"s businesses, a concerning deterioration in an economy that is reportedly improving, and where companies would be willing to take out new credit to fund expansion.

Digging deeper revealed an even more distressing picture as a result of a sharp consumer revulsion toward credit, with reduced level of consumer card and auto loan demand in the quarter. The decline took place despite "visibly softer" underwriting standards for cards which surprised some analysts as not creating incremental demand;

Worse, demand for credit cards is now running at the lowest level in the 5 years the survey has provided credit- card-only data for consumer demand.

The report included special questions regarding commercial real estate lending conditions. Tighter credit policies for most CRE loans were the result of "a less favorable or more uncertain outlook for CRE property prices, vacancy rates or other fundamentals on CRE properties, and capitalization rates, as well as reduced tolerance for risk. Significant net shares of banks also reported less aggressive competition from other banks or nonbank financial institutions and increased concerns about the effects of regulatory changes or supervisory actions as important reasons for tightening CRE credit policies." (Emphasis added.)

Additionally, lending for residential real estate reflected little change in standards or demand by consumers. There was also little change to standards or demand for home equity lines of credit. Auto lending standards tightened. It is likely that concerns about the quality of auto loans may be driving some of the more restrictive conditions for lending. For credit card loans, there was some easing of standards and terms were "basically unchanged".

According to Stone McCarthy the contraction in the retail sector has had some impact here as several chains have significantly reduced or eliminated their brick-and-motor presence.

Not surprisingly, as demand for credit bumbled, banks" willingness to lend improved to 10.8 in April after slipping to 3.1 in January.

Finally here are excerpts from several sellside reports, all of which we unpleasantly surprised by the report, courtesy of Bloomberg.

WELLS FARGO (Matthew Burnell) 

• Primary takeaway remains reduced level of consumer card, auto demand vs 3Q after visible drop in 1Q (published in Jan., responses provided in Dec.)


• Notes "visibly softer" underwriting standards for cards aren’t creating demand; demand now running at lowest level in the 5 years the survey has provided credit- card-only data for consumer demand


• Standards across most other loan products were largely stable, though demand for commercial loan and commercial real estate dropped slightly from prior survey and mortgage demand ticked slightly higher (thanks to lower mortgage rates)

JPMORGAN (Daniel Silver)

• Survey was "a mixed bag," with weakening demand for many key series but also easing in lending standards for some major lending categories


• Easing C&I lending standards may be most important takeaway, even as demand declined

BARCLAYS (Jason Goldberg)

• Loan demand across all lending segments generally softened during 1Q, with C&I demand modestly weaker (though inquiries for C&I lines of credit was unchanged); CRE (broad-based), credit card, auto also weaker


• Key reasons included decreases in customers’ investment in plant or equipment and decreases in M&A financing needs


• Tighter lending standards could foreshadow CRE (particularly C&D and multifamily), auto credit quality deterioration; regulators still focused on CRE


• Lists banks most exposed to auto loans: ALLY followed by COF, HBAN, CFG, FITB, while COF, C, JPM, BAC have largest credit card concentration (all >10% of loans); JPM, MTB, COF, KEY have largest multi- family exposure (though all

EVERCORE ISI (John Pancari)

• Survey shows "tempered tone" around growth, largely reinforcing themes observed in recent results, including sluggish demand and credit tightening


• Notes little change in level of inquiries for C&I lines contrasts with 1Q bank mgmt comments mentioning pickup in borrower optimism, new line openings

SUSQUEHANNA (Jack Micenko)

• Trends support Susquehanna’s neutral view of regional banks (BBT, CMA, FITB, HBAN, KEY, PNC, RF, STI, USB, WFC, ZION) as optimism has yet to translate into notable improvement in loan demand