Red Flag, Or Back To Normal?

[james.hendrickson]

Hi Guys,

Usually when the default rate for various kinds of debts rise (car loans, auto loans, mortgages, etc.) thats a red flag in terms of economic growth. Well, it looks like loan defaults are starting to creep up again, at least according to the NY Post.

“I would say that credit card defaults is definitely a cause for concern,” says Joe Resendiz, an analyst with ValuePenguin, which tracks the credit industry.

Resendiz noted the recent second-quarter net credit card default numbers rose for Bank of America and JPMorgan. In an otherwise rosy report, the amount of in-default charge card bills rose by 10 percent and 9 percent, respectively, compared with the same period in 2017.

Source: NY Post

Data from the St. Louis fed says pretty much the same thing. Default rates have been creeping up since 2015.



Source: St. Louis Fed.

So I guess the question is: is a red flag for a recession, or is pretty much back to business as usual?

[Nutria]

This is a 5 year window. What's the 50 year window?

[corn18]

Not a red flag if you believe long term history. It is a red flag because how soon we forget.

[kork13]

By that single measure, I think for the moment it's going to be a while of "business as usual." Looking back at the Fed's data, the last two recessions occurred when the delinquency rate was around 5%. Currently, sitting around 2.5%. In my mind, it (counterintuitively) indicates the return in consumer confidence that has occurred over the last year or two, because people are more comfortable with how they're doing financially, so they buy more stuff on credit, and by nature, some folks will overextend themselves. So this is a trailing measure of that consumer confidence (confidence up, time goes by as people buy things, then they later get overextended & go delinquent). As that goes on & more people get pinched by their debt loads, people slow down purchases, lose confidence, and we risk entering recession territory. I think the measure is a valid one to consider, but we're not approaching a critical mass at this point.

Side note, the NY Post isn't a very good quality news source...they have a strong predilection toward exaggeration, bombast, and hyperbole. They often take a kernel of fact, and blow it out of proportion to make it seem disastrous.... Case in point. They are champions of click-bait.

[MooseBucks]

Banks are seeing seasoning of some of their vintages that they’ve book since 2009 so increased delinquency is expected. Depending on their lending framework it will be alarming when the default rate double from where it is currently.

[disneysteve]

I'd say a 2.53% delinquency rate is not even a blip to lenders. Heck, I'd love to have a loan business with a 97.47% success rate. I'd be lending out every dollar I could get my hands on.

Now if that line continues to climb, it will become a concern, but I don't think it is at the current level.

[MooseBucks]

I'd say a 2.53% delinquency rate is not even a blip to lenders. Heck, I'd love to have a loan business with a 97.47% success rate. I'd be lending out every dollar I could get my hands on.

Now if that line continues to climb, it will become a concern, but I don't think it is at the current level.

Problem is they’ve lent to every person who represents this level of risk. Shareholders will push for profits to increase and they will loosen their risk guardrails which will increase the default rate.

[disneysteve]

Problem is they’ve lent to every person who represents this level of risk. Shareholders will push for profits to increase and they will loosen their risk guardrails which will increase the default rate.

And then we'll see 2008 all over again .
When we get back to the interest-only and zero down mortgages being commonplace, you know we're in trouble. When they are giving people home loans for 6 times their income, that's a problem. The banks and lenders never learn. Loosening the guidelines always leads down the same road.

[greenskeeper]

Interest only and zero down weren't the problem (stupid yes), the real problem were the NINJA loans that the gov't pushed through because "everyone deserves the american dream"

[corn18]

Actually, the real problem was the debt swapping that went on in the background. People defaulting on loans at a higher than normal rate would not cause a great recession. Financial idiots swapping debt as AAA that was actually junk, often multiple times and then selling derivatives on that debt was where the real stupid happened. Banks should not be allowed to invest in risky assets. Supposedly the law changed and they have to keep the banks separate from the investment business, but I'm not certain that has happened.

[Keshet]

Who's Norma?

[TexasHusker]

Who's Norma?

I went to high school with her.

[james.hendrickson]

Sorry guys! Misspelling on my part. : )