Interest Rate Roundup

Thursday, January 03, 2008

ABA figures show credit problems spreading

We already know the mortgage market is a mess, with the Q3 delinquency rate (5.59%) the highest since 1986 and the foreclosure rate (1.69%) the highest in history. But what about the rest of the consumer credit world? Things appear to be deteriorating there as well. According to the latest American Bankers Association figures (PDF link):

* The delinquency rate on home equity loans rose to 2.28% in the third quarter from 1.79% a year earlier. That’s the highest since Q3 2005.

* The delinquency rate on home equity lines of credit rose to 0.84% from 0.57%. That’s the highest since Q4 1997.

* The delinquency rate on indirect auto loans (loans made through dealers, as opposed to a "direct" car loan you might get from a bank) rose to 2.86% from 2.35%. That’s up from 2.35% a year earlier and the worst reading since Q3 1991.

* The data on direct auto loans is more benign -- delinquencies are well below their mid-2000s level. The credit card news is mixed. Measured as a percentage of accounts, the bank credit card delinquency rate fell to 4.18% from 4.57% a year earlier. But measured as a percentage of total card loan dollars outstanding, the DQ rate rose to 4% from 3.5%. That's the highest since Q4 2004.

Delinquencies are rising for a couple of reasons:

First, the economy is weakening and job growth is slowing. The number of Americans continuing to collect jobless benefits is running around 2.76 million, for example, the highest since October 2005, and a report this morning from ADP Employer Services said U.S. companies added just 40,000 jobs in December. That's the weakest pace in four months.

Second, home values are declining. That's making it harder for consumers to refinance higher-cost car and credit card debt into lower-cost home equity loans. And it's giving more consumers an incentive to "walk away" from their homes -- including their home equity debt -- in the event of financial stress.

Third, rising short-term interest rates have driven the cost of servicing HELOC debt higher, just like they've driven the cost of servicing ARMs higher. Many HELOCs are tied to the prime rate, which closely follows the federal funds rate. As the Fed increased the funds rate, prime rose from 4% in 2004 to 8.25% in 2007. It has since fallen to 7.25%.


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