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The Consumer Debt Blind Spot

 Every three months, the NY Federal Reserve publishes the a Report on Household Debt, which is an excellent industry tool to get a snapshot on what consumers owe. Today’s papers are filled with stories that draw from it from the Associated Press to the Wall Street Journal. The best article out there wonders why the surge in debt is a surprise. We’ve been asking the same question since 3Q16. Debt is growing and we’re not sure if households can handle it. Credit card debt is one thing but when you through on hundreds of billions of student loan on kids just getting out of school, and then easy car credit, credit quality gets weaker and weaker.

• It's unsettling that a growing number of Americans are falling behind on their auto-loan and credit-card bills.

• But it's even more unnerving that analysts seem somewhat surprised by the pace and scope of late payments and losses.

• …lenders including Santander Consumer USA and Ally Financial have been hit by a surprisingly steep deterioration in consumer creditworthiness.

• Capital One and Synchrony recently raised their forecasts for net credit-card charge-offs in 2017, citing weakness among subprime customers rather than their previous rationale of portfolio growth and aging, according to Bloomberg Intelligence.

Smart creditors are acting now to save for the coming storm. It’s an account move. When bad debt losses occur, there is an expense charge to the issuer’s financial statement. They way you smooth out the impact is to build an accrual reserve so you prefund the losses when times are good.
• Capital One boosted reserves for loan losses after changing its outlook for consumer credit (the author supports this claim with a chart showing the increase.

• It's worrisome to think that big lenders may have failed to sufficiently account for certain borrower behaviors, such as prioritizing their medical bills before auto loans or maxing out their credit-card debt limits while trying to meet all their obligations.

So, the good news is that credit is growing, which is fueling the economy, where in the US, 70% is driven by consumer spending.
Now the bad news: credit is growing, and it is not too clear if we can afford to keep our commitment. Evidence: in the $1+ trillion student loan market, 10% is in default. Guess what’s next.Overview by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group

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