February 4, 2023
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Loan Data Shows Exceptional Economic Health, Though HELOCs May Be Cracking

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How bad is the economy?

Not nearly as bad as some are saying, at least according to some key loan metrics.

Delinquencies on loans that are more than 90 days past due are at multi-year lows, according to the latest available data from the New York Federal Reserve.

The percentage of loan volume that is in serious default — more than 3-months overdue — is a key indicator of how strapped for cash individual investors are feeling.

Unfortunately, for all the doom mongers the news is pretty good. Of course, for the rest of us that’s good news.

Bemoaning Student Loans — Not So Fast

Let’s start with the behemoth in the media — student loans. CNBC writes “College graduates are drowning in debt.”

That may be the case, but its not stopping these people from paying on time. The percentage of loans (by dollar volume) that are more than 90 days past due is 3.99% during the quarter ending September 30, 2022, and has not been lower at least back to 2003.

In fact, as recently as the third quarter of 2013 it was almost three times as high, 11.8%.

And, in an important indicator of improving economic conditions, 90-day student loan defaults have dropped every quarter since the last three months of 2019. Lower defaults generally means a strengthening consumer and so a more robust economy.

Mortgages Defaults Ultra Low

Likewsie, loans of mortgages are seeing ultra-low rates of serious default. The 90-day percentage of loan volume that is more than 3-months overdue now stands at a mere 0.37%, the lowest level back at least as far as 2003. Better still, the default rate has remained below 1% since the second quarter of 2020 — when the COviD-29 pandemic lockdowns took hold.

Auto-loans Still Driving Strong

Auto loans are also in decent shape. A reasonable 3.89% of loans were more than 3-months over due in the third quarter. That’s only slightly above the average default rate of 3.7% going back to 2003, and its still the lowest level in more than five years

And the recent figures may be skewed higher than they otherwise would be due to the 2-decade loan increase in the portion of loans offered to borrowers with dodgy credit, also known as subprime loans.

Credit card debt looks stable too. And hows a similar pattern to auto loans.

Home Equity Seeing Cracks

However, there is one point of slight worry: home equity lines of credit (HELOC.) These are typically variable rte loans similar to credit cards, but secured by the real estate owned by the borrower.

Seriously over due HELOCs hit 1.07% of the total volume at the end of September, up from 0.84 ay the end of 2021.

This should be surprising. Many people take out HELOCs when they are strapped. Those loans have also seen the impact of the Federal Reserve rising the cost of borrowing money, which in turn wold have made HELOCs increasingly pricey on a month to month basis. Strapped consumers facing increasing interest payments would tend to lead to increasing levels of defaults, and we should expect that default figure to rise, as long at the Fed keeps hiking rates whether or not the country enters a recession.

As ever, when the fourth quarter default data comes out, we’ll have a better view of how things look and whether that means the economy is facing imminent disaster.



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