Positive, Neutral and Concerning Implications from Increases in Subprime Lending

A common thesis as to why the U.S. economy has struggled to generate robust growth since the 2008 financial crisis has been the lack of credit availability. Given that the majority of U.S. GDP is consumer spending driven, it makes sense that creditors’ reluctance to extend loans to consumers for purchases has been crimping growth. On this front, there is good news. The Wall Street Journal, citing data from Equifax, reported last week that loans to subprime borrowers have reached the highest level since before the financial crisis. The increase in subprime lending, defined as loans to borrowers with credit scores below 640, has been driven by automotive, credit card and personal loans. What neutralizes this good news is the fact that the increase in lending has not gone toward home purchases, which provide the greatest economic boost. Credit standards remain tight for mortgages. Annual subprime mortgage lending has been running at a $4B annual pace since 2009, versus a peak of $625B in 2005, according to Inside Mortgage Finance. The bad news in the most recent lending data is that delinquencies on auto and student loans are rising, which indicates lax credit standards are catching up with lenders. All in all, an increase in credit creation is positive for the U.S. economy, but there is more to the recent report on credit growth than headlines suggest.   
 
Sources: Equifax, Inside Mortgage Finance, WSJ