US household debt continues steady rise: NY Federal Reserve Bank

[NEW YORK] US household debt continued its steady rise in the third quarter, breaking the record set in the previous three months, while increasing signs of trouble appeared, the New York Federal Reserve Bank said Tuesday.

Delinquency on credit cards and auto loans are on the rise, and auto loans also continued the steady upward climb, hitting the second highest level in more than a decade, according to the latest quarterly report.

Total debt held by American families jumped by US$116 billion or nearly one percent to just under US$13 trillion in the third quarter, beating the April-June quarter which was the highest since the start of the global financial crisis in 2008.

The amount of debt that is delinquent - debt with payments more than 90 days late - rose slightly to 4.9 per cent.

Mortgages account for the bulk of borrowing at just over US$8.7 trillion, a US$52 billion increase from the prior quarter, while student loan debt accounts for US$1.4 trillion, up US$13 billion.

But it is the auto loan market that has been attracting particular attention, as delinquency rates have been rising for several years, especially among borrowers with lower credit scores, and because it comprises a large share of the total.

Auto debt increased US$23 billion in the quarter to a total of US$1.2 trillion, while credit card debt rose US$24 billion to US$808 billion, the statement said.

Officials are watching for signs that consumers or financial institutions are becoming overextended.

"Delinquency flows across several debt types climbed this quarter, including for auto loans," said Wilbert van der Klaauw, senior vice-president at the New York Fed.

The delinquency rate for auto loans edged up to four percent and for credit cards rose to 7.5 per cent.

However, the mortgage foreclosure rate hit a new historical low with 69,580 in the quarter, while the delinquency rate was steady at 1.4 per cent. For student loans the rate held at 11.2 per cent.

Mr Van der Klaauw noted that a closer look at auto loans "revealed notable differences" between bank loans and those from auto finance companies, usually car dealers or manufacturers, which make up three-quarters of all auto loans.

"Delinquency rates among auto finance lenders are considerably higher and rising, especially for subprime borrowers, in part reflecting differences in underwriting standards," said.

The data show this trend started about four years ago, when delinquency rates for bank auto loans improved, and while for finance firms it slipped.

That indicates there is something at work beyond the difference in credit score of the borrower, and more to do with the underwriting standards of the lender.

That raises red flags because massive mortgages to subprime borrowers, spurred by a deterioration of lending standards, contributed to the 2008 financial crisis.

AFP