Household delinquencies are on the rise. Should bankers be worried?

Mortgage

More consumers fell behind on their loans in the third quarter of 2018, even as average wages rose and the unemployment rate fell to a 50-year low.

Delinquencies on home equity loans and auto loans drove an overall uptick in installment loans that were at least 30 days past due, according to an American Bankers Association report released Tuesday. The analysis also showed an increase in 30-day delinquencies on credit cards issued by banks, mostly reversing the prior quarter’s improvement in that category.

James Chessen, the chief economist at the ABA, was quick to point out that the delinquency levels are low by historical standards and said that recent trends are more or less a “return to normal.”

Still, if economic growth slows this year, as many economists expect, delinquencies could continue to trend up, Chessen said, adding that he’s already seeing signs of banks tightening their underwriting on consumer loans.

“Banks are taking a cautious approach to any type of loans they extend. They know the economy is slowing a bit and they’re going to be careful of that,” he said. “My hope is that consumers are also thinking about what the future might hold and are being cautious in the amount of debt they take on relative to their income.”

Chessen said that the rise in delinquencies is mainly a function of an overall increase in household debt.

Consumer debt hit an all-time high of $13.5 trillion in the third quarter, according to data from the Federal Reserve Bank of New York, and it appears that some households have become overextended. Rising housing costs in many markets could also be putting the squeeze on many lower- and middle-income households.

Compared with the prior quarter, the ratio of delinquencies in the eight loan categories the ABA tracks climbed 11 basis points to 1.87%. Delinquencies on home equity loans and direct auto loans each rose 10 basis points to 2.53% and 1.16%, respectively. Indirect auto loan delinquencies rose 6 basis points to 1.99%.

Delinquencies on bank-issued credit cards rose 12 basis points to 3.05%.

A report from the bond rating agency DBRS issued on Tuesday also showed the rate of credit cards at least 30 days past due rising from a decade-low rate of 2.01% in the second quarter of 2015 to 2.54% in the third quarter of 2018.

Chessen warned that strong retail sales over the holiday season could foreshadow another uptick in delinquency rates down the road, as credit card bills come due. It’s a phenomenon Chessen has dubbed “February frostbite.”

Still, while the delinquency rate has continued to trend upward, the pace of the increase has slowed. The rate of 30-day card delinquencies fell 3 basis points in the third quarter compared with the same period in 2017, according to DBRS. The rate was flat in the second quarter on a yearly basis and had increased 12 basis points in the first quarter.

Yanni Koulouriotis, an analyst at DBRS, said that that the slowing pace of the rise in delinquency rates is likely due to banks’ tightening lending standards. After years of flooding the credit card market with generous rewards programs and 0% teaser rates, banks have recently started to pull back. Moreover, they’ve become stricter in underwriting to keep a lid on the growing pile of past-due card balances.

“Underwriting standards have been tightening and, as a result, we don’t expect material increases in credit card delinquencies this year,” Koulouriotis said.

One the lending front, the tightening of lending standards could weaken demand for consumer loans, particularly if the economy slows. Demand is also likely to slow if the Federal Reserve continues to raise interest rates, Chessen said.

“The wind in the face will be the interest rates the Fed has pushed up, which are making all loan products more expensive,” he said. “I think that will bite the auto market and constrain the housing market a little bit more. I’m still reasonably bullish about the economy, but recognize there are some headwinds lenders are still sensitive to.”

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