Auto Lending Trends Raise Concerns Despite Stable U.S. Household Credit Conditions

The total amount of U.S. household debt hit the $12 trillion mark in the third quarter. Household debt reached $12.07 trillion on September 30, but those levels are still about 5% below peak levels reached in 2008. One area to watch regarding household debt is the increase in the level of subprime auto loans. Data provided by the Federal Reserve Bank of New York this week showed that more than $110 billion of auto loans were originated for borrowers with low credit scores (less than 660) during the second and third quarters. That is the highest level of subprime auto loan origination since 2006, just prior to the financial crises. Recent auto loan activity has raised a red flag for Comptroller of the Currency Thomas Curry due to the potential impact on banks active in auto lending and on bond investors who have purchased securitized auto loans. In a speech last month, Mr. Curry stated that the auto loan activity reminded him “of what happened in mortgage-backed securities in the run-up to the (financial) crises.”

Ironically, mortgage lending practices have been significantly more conservative since the financial crises. While housing debt constitutes the majority of household debt, mortgage originations hit a 14-year low in 2014, and subprime mortgage originations have nearly disappeared. As a result, foreclosures are at a 16-year low, and mortgage delinquencies are at 2.3% and have continued to decline. 

Sources:  Federal Reserve Bank of New York, Wall Street Journal