The Current Landscape of Consumer Debt

 The Current Landscape of Consumer Debt

March 2015

By Wayne M. Crane, Summit Alternative Investments

In its Q4 2014 Household Debt and Credit Report, the Federal Reserve Bank of New York announced that outstanding household debt increased $117 billion from the third quarter. The one percent increase puts total household indebtedness at $11.83 trillion as of December 31, 2014. Total debt has gone up $306 billion since the fourth quarter of 2013. The report is based on data from the New York Fed’s Consumer Credit Panel, a nationally representative sample drawn from anonymized Equifax credit data.

Balances were largely up across the board, led by mortgages ($39 billion) and student loans ($31 billion). Auto loan debt and credit card debt increased by $21 billion and $20 billion, respectively.

While overall delinquency rates were unchanged at 4.3 percent in the fourth quarter, delinquency rates for auto loans and student loans worsened.

Other findings from the report include:

  • Mortgage originations, which are measured as appearances of new mortgage balances and also include refinanced mortgages, increased to $355 billion, but remain low by historical standards.
  • The number of credit inquiries within six months—an indicator of consumer credit demand—increased by 4 million from the previous quarter, to 175 million.

While the delinquency rates in auto loans worsened this problem is most exacerbated by the increase in subprime lending in that space in 2013 and 2014. Credit standards, based on research by Summit, have loosened in the subprime auto lending arena.

Consumer credit increased at a seasonally adjusted annual rate of 5-1/2 percent during the fourth quarter. Revolving credit increased at an annual rate of 3 percent, while non-revolving credit increased at an annual rate of 6-1/4 percent. In December, consumer credit increased at an annual rate of 5-1/2 percent. The charts below are taken from the Federal Reserve February Reports of consumer credit.

The most recent information available in the marketplace indicates that consumer loan delinquency rates keep improving overall since the “Great Recession,” although not across the board, as there were upticks in the delinquency rates for both student loans and auto loans.

The chart below shows 90+ day weighted delinquency by general asset type.

Percent of Balance 90+ Days Delinquent by Loan Type












The delinquency rates for mortgages, home equity lines of credit (HELOCs), auto loans, and credit cards peaked noticeably in the years following the recession, and have since fallen. In the case of mortgages, the 90+ day delinquency rate is now about 3.1 percent—still considerably higher than the roughly 1 to 1.5 percent rates we saw before the Great Recession. To some degree, this can be explained by the fact that the lengthy foreclosure process in many states is slow to clear out the stale stock of homes.  Credit card delinquencies have been steadily improving, and are now at some of their lowest levels.  Auto loan delinquencies have followed a similar trajectory until recently.

The 90+ day delinquency rate for student loans, however, is different from the others—the rate has increased substantially since student loan data began in 2003, and has now reached 11.3 percent. Student loans have the highest delinquency rate of any form of household credit, having surpassed credit cards in 2012. There are several reasons for this. Student debt is not dischargeable in bankruptcy like other types of debt; thus, delinquent or defaulted student loans can stagnate on borrowers’ credit reports, creating an ever-increasing pool of delinquent debt.

The market for consumer asset trades has slowed some since the recession.  However, Summit is seeing increased opportunities in the banking sector.  As banks continue to rebalance their portfolios, search for higher yields, there are interesting portfolios being both sold and purchased in the space.  This gives rise to both an opportunity to buy certain pools of assets and also to potentially sell certain pools, allowing Summit an opportunity to work both sides of the equation.  In addition, many of the IB’s that purchased pools during the 2008-2012 time frame are now seeing those investments become small as a part of their overall investment portfolio and are looking for ways to sell the remaining pools; this is also a potential market opportunity.

As a result Summit continues to focus its sourcing efforts on the consumer performing asset market across the credit spectrum but with more of a concentrated effort in the higher consumer credit bands.  Summit is shying away from traditional student loan portfolios. But the performance of technical school loans does not mirror the poor quality of traditional student loans. Historically, technical and alternative school loan assets have performed well and can be priced to attractive yields. As well, graduate student loans in the professional schools such a medical student loans continue to perform at a very high level and seem unrelated to the student loan portfolios of undergraduate students seeking a baccalaureate degree.

Summit continues to measure its pipeline by the quality of opportunities rather than the quantity, and is working on several projects that include small balance loan portfolios and flow assets in Mexico of over $100 Million of annualized flow. Summit is previewing portfolios of assets of small loans in Columbia. In the U.S., Summit has been looking for potential buyers for a portfolio of rental homes across a dozen states valued at approximately $500 Million which could be bifurcated. Summit is pricing a $1.2 Million portfolio of seasoned loans of mixed asset classes. And Summit is working on a $100 Million revolving line of credit with a sub-prime motorcycle lender that could also contain a private securitization take-out on an interval basis…a warehouse type of lending structure. The portfolio also contains a possible transaction involving a roll-up of several captive auto finance companies.

  • 19 Mar, 2015
  • Josh Smith

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