Guest Post by Wolf Richter
Signs Of The Top: Subprime Credit Card Issuance Surges; Finanical Stress Index At All-Time Low
During the first quarter, 3.7 million credit cards were issued to subprime borrowers, up a head-scratching 39% from a year earlier, and the most since 2008. A third of all cards issued were subprime, also the most since 2008, according to Equifax. That was the glorious year when “subprime” transitioned from industry jargon to common word. It had become an essential component of the Financial Crisis.
As before, subprime borrowers pay usurious rates. These are people who think they have no other options, or who have trouble reading the promo details, or who simply don’t care as long as they get the money. In the first quarter, the average rate was 21.1%, up from 20.2% a year ago, while prime borrowers paid an average of 12.9% on their credit cards, and while banks that are lending them the money paid nearly 0%.
These usurious rates and the fees that are artfully tacked on to the bill at every remotely possible occasion make it nearly impossible that the borrowers can ever pay off their credit cards. They’ll just keep paying the minimum payment, while balances balloon. And they’ll balloon even if the holder no longer charges to the card. Subprime credit cards are there to be maxed out, and the only thing that keeps these folks out of trouble is getting more cards, juggling cards, transferring balances, taking out cash advances on one card to make the minimum payments on the others….
Banks play along, whipped into a frenzy by the sweet smell of usury. Their credit-card promos are once again clogging up mailboxes around the country, and profits on these cards soar, and everyone is happy – banks, borrowers, and of course the American economy that thirstily laps up borrowed money.
“I was surprised they’d give me so much,” the Wall Street Journal quoted one of the winners who’d recently gotten a credit card with a $15,000 credit limit. But as long as new credit cards with ever greater credit limits are available, banks won’t have to worry about charge-offs, no matter what the balance or the cardholder’s ability to make payments.
The St. Louis Fed has a measure for that symptom: the Financial Stress Index. It has been skittering from one all-time low to the next. It shows that years of nearly free money sloshing through Wall Street has just about eliminated any kind of financial concern.
The index, which dates back to 1993 and is based on 18 components, has an average value of zero. Higher financial stress shows up as a positive value, lower financial stress as a negative value. In the latest reporting week, ended June 20, the index dropped to -1.332, the lowest in its history for the fourth week in a row.
The previous period of record lows occurred in February 2007, hitting bottom at -1.268. Stocks were flying high, LBOs livened up lunch conversations, and the media swamped Americans with delicious hype. OK, housing was “taking a break,” as it was called. Banks and mortgage lenders were cracking at their foundations. But so what. Financial stress had been wrung out of the system. There were no risks.
Then some reeking details infiltrated the Financial Stress Index. By the time Bear Stearns collapsed in early 2008, it was ratcheting higher erratically. In August that year, it spiked. Then Lehman popped, stocks plunged, junk-bond yields soared, bank CEOs wondered who’d be next, and on October 17, it peaked at a cathartic 6.27. Wall Street had gotten tangled up in its own underwear.
The Fed’s tsunami of free money bailed out Wall Street and our over-indebted corporate heroes. Among them GE whose CEO Jeff Inmelt was a Class B director of the New York Fed, which handled the bailouts. And the Financial Stress Index plunged. By December 2009, it was back at zero. Financial stress was expunged from the system even as the greatest unemployment crisis in recent history was ravaging the country. On the sound principle that handing unlimited amounts of free money to Wall Street would reward Wall Street.
But the Financial Stress Index has a peculiar feature: it pinpoints the time when credit quality deteriorates, when asset prices have been inflated to dizzying levels, when subprime lending becomes a low-risk business model, when reckless financial decisions are being made by everyone in the system, from cardholders to bank CEOs, and when a new set of logic explains in detail why this craziness is perfectly reasonable. Yet these issues are time bombs that are cluttering up the shelves, ticking away.
Meanwhile, thanks to record low financial stress in the system, subprime cardholders are happily spending themselves into nirvana. But once they’ve run up their balances to vertigo-inducing heights, the banks open their eyes. Stunned by what they see, they don’t want to play anymore. They stop raising credit limits and sending out new cards. Then they see the other time bombs ticking on their shelves. And suddenly we’re back to 2008. That’s what the record low financial stress index is pointing at.
The thing is, banks are again taking the same risks that triggered the Financial Crisis, and they’re understating these risks. It wasn’t an edgy blogger that issued this warning but the Office of the Comptroller of the Currency. And it blamed the Fed’s monetary policy. Read….Federal Regulator Details Crazy Risk-Taking By Banks, Blames Fed
This is a syndicated repost courtesy of Testosterone Pit. To view original, click here.
Makes sense, I payed my bill every month and they lowered my limit. I guess I wasn’t a ‘good’ debtor by not forsaking my life for those fucks.
More dickheads will do the same crap as before…charge’em up and walk away. I guess it’s another form of free shit.
Just this morning I caught some commercial for mortgage loans, I don’t remember whether it was for original purchase or refinance but they were pushing 100% loans. I mean fuck me!! When this thing blows up again there’s no way anyone can say they couldn’t see it coming.
Nothing new. They have been doing this for at least 40 years with car loans and housing.
Subrpime 2.0 Spreads To Cars: OCC Warns Of Auto-Loan Risks
Submitted by Tyler Durden on 07/01/2014 11:44 -0400
It would appear that the exuberance over today’s better-than-expected car sales data should be tempered significantly. Confirming our warnings, as the Office of the Comptroller of the Currency (OCC) explains, across the industry, auto lenders are pursuing growth by lengthening terms, increasing advance rates, and originating loans to borrowers with lower credit scores. With average loan-to-value rates above 100%, they have an ominous warning: “risk in auto-lending is beginning to emerge.” We are sure this will be dismissed (just as the BIS’ warning has been), but with surging charge-offs and increased repackaging (CLOs), and banks holding a lot of this debt, this ‘bubble-financing’ has all the ingredients for subprime 2.0 contagion.
Auto-loans are surging… Subprime auto-loans were up 10-fold in 2013…
As OCC reports,
Auto lending remained a highly competitive product segment, as strong growth continued through the end of 2013.
Banks reported year-over-year growth of 11.3 percent in the third quarter of 2013 and 12.9 percent in the fourth quarter of 2013 (see figure 18). Banks continue to hold a sizable market share of outstanding loans of $250 billion, or 31 percent of the total auto lending market.
But risks are rising… Signs of Risk in Auto Lending Beginning to Emerge
Across the industry, auto lenders are pursuing growth by lengthening terms, increasing advance rates, and originating loans to borrowers with lower credit scores. Loan marketing has become increasingly monthly-payment driven, with loan terms and LTV advance rates easing to make financing more broadly available. The results have yet to show large-scale deterioration at the portfolio level, but signs of increasing risk are evident. Average LTV rates for both new and used vehicles are above 100 percent for all major lender categories, reflecting rising car prices and a greater bundling of add-on products such as extended warranties, credit life insurance, and aftermarket accessories into the financing (see figure 26).
The average loss per vehicle has risen substantially in the past two years, an indication of how longer terms and higher LTVs can increase exposure. Average charge-off amounts are higher across all lender types over the last year (see figure 27). These early signs of easing terms and increasing risk are noteworthy, and the OCC will continue to monitor product terms and risk layering practices to ensure that banks manage growth and exposure prudently.
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Close your eyes and keep buying… the water is warm… Risk is “contained”