Consumer Credit Conditions, June 2016

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Overview

At an aggregate amount of $842.5 billion, total consumer debt in the Eleventh Federal Reserve District [1] increased 6.8 percent from June 2015 to June 2016. This is a jump from last year’s rise of 5.7 percent. However, the number of people with a credit report rose just 2 percent compared with last year’s increase of almost 3 percent. This means that growth in borrowing is responsible for the majority of this climb.

Within this aggregate increase, consumer finance loans—personal loans, including those provided by alternative financial services—rose the most, up 13.9 percent from June 2015. Auto loans were a close second, climbing 10.2 percent in this time period. Home equity installment loans—lump-sum loans borrowed against the equity in one’s house—were the only decrease, down 1.6 percent. Bankcard debt, or typical credit card accounts, grew 7 percent, far outpacing the national rate of 3.8 percent. The growth rate in the district was also higher for student loans (7.5 percent versus 6 percent). Mortgages increased 6 percent compared with just 3.4 percent last year.

Though their aggregate balance increased, the share of mortgages in the total debt portfolio continued its downward trend, dropping to 58.4 percent from 58.8 percent and 59.8 percent in 2015 and 2014, respectively. Still, it represents the majority of debt for consumers in the Eleventh District.

Texas is the only state in the nation to have home equity loan regulations, capping the amount borrowed at 80 percent of the market value of the home; 20 percent equity must always remain in the home. This helps keep the debt balances low for the state. In fact, researchers suggest these regulations helped keep Texas’ serious delinquency rates for subprime loans—those made to consumers with credit scores typically below 620—10 percentage points lower than the nation’s during the Great Recession.[2]

Delinquencies: A Tale of Two Loans

With regard to delinquencies, the rates of late or outstanding payments dropped for many loans. For all loans in the district, delinquencies decreased from 6.03 percent in 2015 to 5.65 percent in 2016. Student loan delinquencies dropped nearly 2 percentage points in Texas and the district, and serious delinquencies also declined 1.66 and 1.77 percentage points, respectively. Mortgage delinquencies fell by over 1 percentage point across the country and about 0.43 percentage points in Texas. This is the lowest that mortgage delinquencies have been since June 2006.

But the downward trend is not true for every loan. Increasing rates of loan volume growth coupled with increasing delinquencies can be a cause of concern for the economy. In the national and Texas subprime markets, this is true for two loans: auto and retail. Yet, concerns about the long-term impact of these trends differ for the two loans.

Retail loans, which include department store, electronic and home furnishing loans, have historically had higher rates of delinquencies than others such as mortgages, bankcards, home equity or auto. Much of this is likely due to the relative ease of getting approved and the higher interest rates charged.[3] In the subprime market, at least a third of these loans are past due. And although aggregate retail debt has increased for all credit scores in the past five years, since 2014, the rate of growth in the subprime market has been about triple that of the prime market. Much of this is likely demand-driven—the increase is correlated to  a growth in retail sales—and related to the accessibility of retail credit over bankcard credit for those with low credit scores. However, the total volume of retail loans as well as their share in the total debt portfolio is small. In Texas, for example, retail loans represent 1 percent of the per capita loan portfolio, while in the United States, they represent just 0.7 percent. Therefore, the impact on the aggregate portfolio is minimized, despite the higher rates of delinquencies.

In contrast, auto loans, which have received a lot of attention in the past year, represent a substantial and growing share of the total loan portfolio for consumers both in the Eleventh District and the United States. Across the nation, auto debt surpassed $1 trillion dollars in 2016. The volume of auto debt per capita has grown by more than 18 percent in Texas since 2014, now representing more than 16 percent of an average consumer’s debt portfolio. This is the highest share of any loan type, with the exception of mortgages. In fact, when one excludes mortgages (which constitute the majority of portfolios in Texas), auto loans now represent about 40 percent of the remaining loan balance per capita. By contrast, retail loans represent 2 percent.

Rates of delinquencies in the subprime market have risen in the past few quarters. In fact, the share of deep subprime loans that are seriously delinquent is at its highest since 2012, at more than 20 percent (Chart 1). Furthermore, the overall subprime balance in Texas has grown 28.5 percent in two years. This growth rate is the eighth highest in the nation.

With rates of serious delinquencies for all retail borrowers reaching nearly 10 percent, retail loans can have a substantial negative impact on the financial well-being of an affected borrower. However, due to the low volume, the size of the impact on borrowers as well as the economic health of the state and country is minimized. In contrast, with auto loans representing 16 percent of the total outstanding debt per capita in Texas—much higher than the nation’s 9 percent—there are concerns about the size and length of consequences for borrowers as well as the overall economy. This is why auto loans have garnered growing attention from economists and the media over the past year. As delinquencies and defaults rise within the subprime market, with volume also increasing, auto finance companies, lenders, borrowers and local economies could be affected. The New York Times notes that in the case of an uptick in car repossessions, the economy could take a “stinging hit.”[4]

Although this is concerning, this news should not sound the alarm for a repeat of the mortgage crisis: trillions of dollars of mortgage credit were inextricably linked to investments and the economy at large prior to the Great Recession. Auto debt, however, is far smaller and less entangled in the overall financial system: mortgages are securitized at much higher rates, while the terms of auto loans are far shorter, and repossessions are far easier.

Notes

1. The Eleventh Federal Reserve District consists of Texas, northern Louisiana and southern New Mexico. See map of counties here: www.dallasfed.org/fed/counties.
2. “Did Home Equity Restrictions Help Keep Texas Mortgages from Going Underwater?“ by Anil Kumar and Edward C. Skelton, Federal Reserve Bank of Dallas Southwest Economy, Third Quarter 2013, www.dallasfed.org/research/swe.
3. “Think at Least Twice Before Opening a Store Credit Card,” by Theresa Agovino, CBS MoneyWatch, Nov. 17, 2016, and “5 Things You Need to Know About Store Credit Cards,” by Geoff Williams, U.S. News & World Report, Sept. 20, 2016.
4. “As Auto Lending Rises, So Do Delinquencies,” by Michael Corkery, NYTimes.com, Nov. 30, 2016.

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