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FT: US Banks Fear Subprime Bubble in $1.2 Trillion Auto Loans Market

Image: FT: US Banks Fear Subprime Bubble in $1.2 Trillion Auto Loans Market
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By    |   Tuesday, 30 May 2017 08:43 AM

Big U.S. banks reportedly fear consumers have taken on more debt than they can handle as the $1.2 trillion car loan market shows warning signs of a bubble similar to the subprime mortgage crisis.

“Lenders piled into the sector in the years after the financial crisis, as low defaults and an improving economy encouraged them to focus on a market that performed relatively well as mortgages soured,” the Financial Times reported.

Total loans across the industry rose to $1.17 trillion at the end of the first quarter, according to the New York Federal Reserve, up almost 70 per cent from a trough in 2010.

“But data released last week by the Federal Deposit Insurance Corporation showed the first sequential drop in car loans outstanding at commercial banks in at least six years. The total slipped $1.6bn to $440bn from the fourth quarter of last year to the first of this, suggesting that banks — wary of repeating the mistakes of the subprime mortgage crisis — have been spooked by rising delinquencies and the threat of litigation,” the FT reported.

One of the banks pulling back is Citizens Financial Group, the US’s ninth largest by assets. Bruce van Saun, chief executive, told the Financial Times he would rather steer resources into areas such as student loans. “We ran up auto for a while when there was not much else going on. Now we have growth in other areas which offer better risk-adjusted returns.”

Analysts “expect the car loan market to keep growing, fanned by specialist non-bank lenders which focus on borrowers with lower credit scores. But the caution of the big banks — which claim more than 30 per cent of the market — shows that many are now worrying about the consequences of looser underwriting, which has seen them stretch out terms for borrowers while pushing up loan-to-value ratios and debt-to-income ratios, in an echo of the subprime crisis,” the FT reported.

The Fed is monitoring subprime auto and student loans but they are not near danger levels, St. Louis Federal Reserve President James Bullard said, Reuters reported.

Meanwhile, Americans' debt level reached a record high this year, surpassing the peak touched just as the worst of the recession was taking hold in 2008, and marking a milestone for households that now lean less on mortgages and more on auto and student loans, Reuters reported.

Total U.S. household debt was $12.73 trillion at the end of the first quarter of 2017, up $473 billion from a year ago, according to a Federal Reserve Bank of New York survey.

Total indebtedness is now 14 percent above the 2013 trough of household deleveraging brought on by the 2007-2009 financial crisis and Great Recession. The previous peak, in the third quarter of 2008, was $12.68 trillion, and the New York Fed stressed that the pull-back since then marked an "aberration" from what had been a 63-year upward trend in household debt.

The quarterly survey on household debt and credit showed that overall delinquency rates were roughly flat at 4.8 percent. While balances have steadily shifted to more credit-worthy borrowers, New York Fed economists raised some concern over the 11 percent of student loan debt that was "seriously delinquent" at the end of March.

"This record debt level is neither a reason to celebrate nor a cause for alarm," Donghoon Lee, a research officer at the New York Fed, said in the report. "Auto loan and credit card delinquency flows are now trending upwards, and those for student loans remain stubbornly high."

The survey showed lenders tightened borrowing standards for home and auto loans, a sign of their increased caution.

Mortgage debt of $8.63 trillion, while up $258 billion from a year ago, represents a much smaller share of overall indebtedness than during the crisis.

Taking up the slack has been student loans, which rose $83 billion in a year to $1.34 trillion at the end of the first quarter, as well as auto loans, which rose by $96 billion to $1.17 trillion, the survey said.

(Newsmax wires services contributed to this report).

© 2017 Newsmax Finance. All rights reserved.

 
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Big U.S. banks reportedly fear consumers have taken on more debt than they can handle as the $1.2 trillion car loan market shows warning signs of a bubble similar to the subprime mortgage crisis.
Banks, Subprime, Bubble, Auto, Loans, Car
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2017-43-30
Tuesday, 30 May 2017 08:43 AM
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