August 29th, 2012
Despite conflicting signals coming from the Federal Reserve’s consumer credit data (namely ghastly student loan debt burdens), household deleveraging continued apace in the second quarter. According to the New York Fed’s Quarterly Report on Household Debt and Credit released Wednesday, household indebtedness fell 0.5% (-$53 bln) to $11.38 tln in Q2. After peaking at 95.6% of real GDP in Q3’08, household indebtedness was just 83.3% of real GDP in Q2’12. The dark side of this report, however, was an alarming rise in delinquencies for student loan payments, which even the Fed says may be underreported by half.
In the second quarter, the number of consumers with a foreclosure notation added to their credit reports fell to 256,000, the lowest since mid-2007. Credit card balances are their lowest in a decade and off nearly one-fourth (-22.4%) from the Q4’08 peak. At just 10.9%, credit card delinquencies are now the lowest in 10 quarters and trending lower. Auto loan debt (+1.8%q/q) is rising faster than student loan debt (+1.1%q/q) but the delinquency rates for student loans increased to 8.9% in the second quarter. By the Fed’s own admission, delinquency rates for student loans in this report likely understate actual delinquency rates because almost half of these loans are currently in deferment, in grace periods or in forbearance and therefore temporarily not in the repayment cycle. According to the authors, “This implies that among loans in the repayment cycle delinquency rates are roughly twice as high.”
There were some $25 bln in new seriously delinquent (NSD) student loan balances in the second quarter. As a percentage of all NSD balances, student loans took up 19.3%, their largest share in 8.5 years of reporting. NSD student loan balances in the second quarter climbed to where NSD credit card balances peaked in the last recession (Q1’09). The trend in rising NSD student loan balances by no means looks complete and it looks entirely plausible for these loan balances to soon surpass NSD mortgage balances, currently at $82 bln but in a downtrend. Extrapolating the trend of the last four quarters, it will take only six more quarters (Q4’13) for this degeneration to occur.
Economists at National Bank Financial Economic Strategy wrote Wednesday, “Student debt has soared in recent years to reach a record 28% of non-mortgage household debt in Q2. While student loans account for 8% of total household debt, they accounted for a disproportionate 13% of delinquencies in Q2. That’s over twice the share of delinquencies seen in 2010Q1 when student loans accounted for 6% of total debt. The spread has never been that big between the students’ share of total delinquencies and the students’ share of total debt. With the US government decision two years ago to back student loans, the growing problem of delinquencies makes the task of reducing the federal budget deficit a bit more challenging.”
The loan products listed above affect the consumer asset-backed securities market, as when delinquencies rise, yield and payment rate metrics fall (and vice versa). In their Consumer ABS Monitor for August, strategists at Barclays Securitization Research wrote Wednesday, “Bank card performance at the trust level was mixed [during the July collection period]. Half the trusts we track reported higher charge-offs, but two-thirds reported improving delinquency and yield metrics.”
Analysts at Morgan Stanley Research wrote Friday, “Equifax said consumer credit continued to improve across most segments in July*: credit card 60+ day delinquency ratio declined -21% y/y, auto 60+ DQs declined -35%, first mortgages 30+ DQs declined -15%, and revolving home equity 30+ DQs declined -7%. Student loan delinquencies however, continued to deteriorate (60+ DQs up +14% y/y) given weak employment opportunities for new graduates.”
* The Federal Reserve reports July consumer credit on September 10. In their June report, nonrevolving credit held by the federal government rose to $470.7 bln, a 29.9% increase over the June 2011 level and a 406% increase over the December 2007 level. Consumer loans held by the federal government include loans originated by the Department of Education under the Federal Direct Loan Program, as well as Federal Family Education Loan Program loans that the government purchased from depository institutions and finance companies.
According to tables provided by Citi Research, Triple-A student loan ABS have a spread to LIBOR that is double that of credit cards in the 3- and 10-year spaces and 85% higher in the 7-year space. For 10-year Single-A student loan ABS, expect a spread of 350 bp over LIBOR, more than 3.5 times what you would expect to pay for (earn from) 10-year Single-A credit card ABS. The rate of delinquencies suggests spreads will continue to widen.
The hyperbolic rise in student loan debt has become more than rhetoric in the fall political races. Now that delinquencies have also started to accelerate, dealers feel that a monetary or fiscal policy solution can’t be far off.