Cash Out Refis 10-Yr High, Private-Label Credit Card Delinquencies at 7-Yr High

If you think the economy is improving, you better check your facts and some disturbing trends.

Despite the much ballyhooed "strong jobs" economy, things are not what they seem upon closer inspection.

For example, Store-Branded Credit Card Delinquencies Hit 7-Year High.

The share of private-label credit cards with accounts at least 60 days delinquent is 4.65%, up from 4.08% in March 2017, Equifax said Wednesday. That’s the highest since early 2011, the credit reporting agency said.

Some banks have expanded their lending to subprime borrowers as the economy has improved, says Matt Schulz, senior industry analyst for CreditCards.com.

Private-label credit card interest rates are higher than credit cards generally. They have been rising as the Federal Reserve has boosted short-term rates since late 2015, increasing the payment burden on those subprime borrowers. The rate for private-label cards is about 25.5%, up from 24.99% six months ago, according to CreditCards.com. The average rate for all credit cards is 16.73%, up from 16.15%.

Who Can Afford 25% Rates?

Who can afford 25% interest rates with balances rolling over every month?

The answer, of course, is no one.

This leads up to what I will label the logical non-solution.

Logical Non-Solution

Data from Federal Housing Finance Agency show the Home ATM is Spewing Cash.

Equity pulled from homes to finance consumer spending and property improvements and pay off other debts rose in the first quarter to the highest in almost a decade, according to Federal Housing Finance Agency data.

Good Times

Let the good times roll baby!

The logical non-solution works only so long as home prices keep rising, employment stays elevated, and credit keeps expanding.

I suspect the party is about over.

For further discussion, please see my prior report Housing ATM is Back (But it won't work any better this time).

Related Articles

Housing Peak? Existing Home Sales Drop 2.5%, Down Year-Over-Year Second Month

April New Home Sales Slide 1.5%, March Revised Sharply Lower

Mike "Mish" Shedlock

Comments (23)
No. 1-22
hmk
hmk

I just heard on one of the MSM channels that the decline was probably an abberation and that YOY home sales were up 8.1%. Also heard the day before that deliquncies were very low, consumer debt was very low and bankruptcies were very low. I thought it didn't make sense when I heard this stuff so either they are outright lying or putting a statistical spin on the numbers. BTW I think auto sales are softening, I just got a incentive mailed to me by GM for adding $2000 in car rebates to my GM credit card that accumulate 500 dollars a year up to $3500 max, ie 7 years of credits. I have never recieved this much of an incentive offer before.

thimk
thimk

wonder if this data includes HELOC's. Why would anyone refi their mortgage at a higher rate? Unless it is a variable rate ?

Blurtman
Blurtman

Proof, once again, that the economy is crashing, and has been crashing since we exited the gold standard. Run for your lives!

CzarChasm-Reigns
CzarChasm-Reigns

Yes, the economy sucks for nearly everyone, but oddly enough, it's been great for the billionaires. "The super-rich are for the most part speculators. They derive their income not by contributing to the process of production, but by gambling, stealing and cheating. Among all billionaires, the portion of total wealth derived from shares of stock increased from 32.9 percent in 2016 to 41.5 percent in 2017." Selected quote above from "Wealth-X report shows billionaires gained $1.8 trillion in 2017" http://www.wsws.org/en/articles/2018/05/21/pers-m21.html There is No Trickle Down; just "Suck It Up".

Sechel
Sechel

25% rates are not designed for loans to be repaid. they are designed to extract enough money from the borrower before a default that the lender comes out ahead. At 25% we're talking usury.

themonosynaptic
themonosynaptic

"Some banks have expanded their lending to subprime borrowers as the economy has improved, says Matt Schulz, senior industry analyst for CreditCards.com."

As you get more risky borrowers, you should expect higher delinquency rates. Where's the story?

As equity grows in property, people swap high interest rate debt for low interest rate and tax preferred HELOCs. Again, where's the story?

Sechel is right, 25% rates are not designed to be repaid and the lenders try to get their profit before the borrower defaults. The borrowers often only look at the monthly payment and disregard the interest rate and/or duration of the loan, and will keep taking on more debt in the form of $35/month minimum payments until the banks stop lending to them.

We either put responsible lending laws in place, or we let the market teach the innumerate basic personal finance. As long as we don't crash the banking system and they come to the taxpayers for bailouts, I don't care which they choose. I wish personal finance was taught in elementary schools, but given the breathtaking ignorance in the subject from even post-grads I work with, I'm not holding out much hope.

Runner Dan
Runner Dan

“We either put responsible lending laws in place, or we let the market teach the innumerate basic personal finance.”

No! We need to strengthen bankruptcy laws in favor of the consumer and allow lenders to fail. No need to teach anyone anything. When the lenders start losing their own money, they will lend responsibly. If no one can afford to buy things, then prices will have to (and will!) fall to affordable levels. Step two, of course, is to get the government out of every market they interfere with by way of subsidies, as subsidies result in inflated prices to the delight of those who sell in that market. Then we will see prices dictated by the same mechanism which determines the unsubsidized, private sectors’ pay - a “free market”. Why is this so hard to grasp? (Not pointing the finger just at you, themonosynaptic).

Carl_R
Carl_R

25% is very reasonable compared to the "Payday Loan" industry. Do you have any stats on them, Mish? They loan to the people who don't qualify for 25%. They will hold a check until Payday. They don't charge "interest" so that they won't be in violation of usury laws. Instead they charge a "fee", say, 10% of the loan for holding the check two weeks. For those keeping score at home, 10% interest for 2 weeks computes as 1.10^26-1, or 1092% a year. The fee may actually be higher than 10%, I don't know for sure, so the interest rate may be much higher than 1100%. Runner Dan, this is a perfect example of what you want, I presume. Payday lenders aren't going to collect in bankruptcy, so they can fail. To prevent that, they charge enough to make sure they come out ahead, even when virtually all the people they lend to fail. It's the classic free market at work. In the old days, we called these guys loan sharks, though, not "Payday lenders". Note that these kind of lenders also exist to lend to (pray on?) small businesses. They will loan you money, few questions asked, and approve you in minutes. In return, they take a portion of your credit card receipts every day. Check out the average lending rates of companies like On Deck and Kabbage, if you can (it's very difficult to find their actual rate). I believe you will find them far higher than 25%. One review of Kabbage I just looked at listed their APR at between 18% and 106%.

Jymbeau
Jymbeau

Danny boy, I agree completely. They intentionally don’t teach finance in school but maybe creationism can help some people, but a large percentage of our population think Jesus is coming back to earth To fight a battle on a hill in northern Israel, I wonder.

Realist
Realist

Payday loan maximums vary around the world. Australia, 4%/month, Canada 60%/yr, US varies by state.

Carl_R
Carl_R

4% a month is 60.1% a year, so Canada and Australia are about the same. My state considers over 16 to be usury, however it exempts revolving credit, and it apparently doesn't count "fees". In any of the above, these dwarf the 25% on credit cards.

shamrock
shamrock

I don't think you understand the difference between "share of refinancings" and the net dollar amounts cashed out. Of course cash out share of refinancings is up, because total refinancing is WAY down, and rates are so high there really isn't much other reason to refinance. Meanwhile mortgage delinquency rates are at decade lows. https://fred.stlouisfed.org/series/DRSFRMACBS Why do your "closer inspections" always leave out hidden positives?

thimk
thimk

well it seems that the interest on Heloc's can only be deducible (per new code) if the funds are used for home improvement.

themonosynaptic
themonosynaptic

"When the lenders start losing their own money, they will lend responsibly."

Dan: I think I am agreeing with you - lenders lose more money lending to higher risk borrowers, so charge higher rates to compensate. Tilting bankruptcy laws will either keep some borrowers locked out of the market or increase the rates for everybody else to cover the higher losses the lenders incur.

I'm not sure how you can advocate government legislation to dictate bankruptcy in one sentence then advocate for the government to get out of the market shortly after.

Rengaw
Rengaw

@Mish, today I met a friend of mine who is also reading your blog. We were talking how the economy is doing and there was this one chart on Fred page that looks just like before the great financial crisis and obviously is a red flag. Just wanted to know your thoughts?

Stuki
Stuki

“I'm not sure how you can advocate government legislation to dictate bankruptcy in one sentence then advocate for the government to get out of the market shortly after.”

To “get the government out of the market,” includes getting them out of the pro-bono collections agency business. Leaving you to simply stiff the lender. Burn the “court summons” for heat and move on. Take the few bucks the Payday shark lent you and buy a Midnight Special. Stick it in his face when he comes to collect. While leaving the government out of it. For real.

The entire business of lending miniscule sums to bad risks falls apart unless you get to offload your collection cost onto tax payers. Which means the “business” is no “business” at all. And instead just a racket to indirectly pilfer money from tax payers. Like rest of the financial “industry.” Or at least 95+ percent of it.

TheLege
TheLege

Perhaps, Themo, the real story is that these are late stage developments. Rather than, as proposed by Matt Schulz, lending to Subprime is less about 'economic confidence' and more about a saturation of lending to the above segments, we'd be closer to the truth. Profits growth is, after all, the be all and end all of life itself

Rengaw
Rengaw

Hi @Mish. I can't find that chart anymore. I think you should know about. it Could you please try to find it?

Ambrose_Bierce
Ambrose_Bierce

When you say store based CC I think first of Lowes and Home Depot, (Lowes offers a discount) and then gasoline credit cards, (Chevron offers a discount) So if I had a big remodel done and now I can't make the monthly, that sounds like it.