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Ever since the financial crisis of a decade ago we've all been a bit paranoid about debt, and in particular, about debt of the US consumer. Well, here's some good news. Mortgage debt does not seem to be set to start another set of problems. This chart shows the percentage of US consumer debt that is over 90 days delinquent.
The red line here shows mortgage debt, and as you can see the trend is clearly down. Seriously delinquent mortgage debt is now at about 1 per cent of total mortgage debt, down at pre-crisis levels. And clearly, banks and consumers both learned a lesson in 2008, 2009. Banks have tightened underwriting standards. Buyers are a bit more cautious, and lower interest rates make mortgages easier to pay.
Now something to be more worried about. As you can see, delinquent auto debt is on a clear rising trend... is approaching the levels of delinquency we saw in the financial crisis and is well above pre-crisis levels. A study by the New York Federal Reserve Bank showed that the rising delinquency in auto debt is particularly concentrated among consumers with low credit scores and lower income consumers.
So for one thing, this rising line should make us wonder whether the US consumer is really as healthy as she appears and whether the booming market for securities backed by auto loans is as stable as it appears. There is, however, some good news. First, auto debt has some characteristics that make it intrinsically stable. Most importantly, it is always at the top of US consumers' priority list for debt payments.
As the old saying goes, you can sleep in your car, but you can't drive your house to work. Another important point, there isn't nearly as much auto debt as there is mortgage debt. Next, in relative terms, there is not that much auto debt outstanding. Yes, there is $1.3tn of car loans outstanding in the United States, but that's not actually that much compared to mortgage debt at $9.5tn.
Finally, and perhaps most importantly from the point of view of the crisis, a lot of auto debt is not held at banks. The majority is held either by asset managers or at non-bank lenders, so should this rising trend in delinquency in car loans in the United States make us worry about the health of the US consumer? Yes. Should it make us hesitant as investors to take a lot of risk in this category? Perhaps. Should it make us worry about the stability of the financial system? Almost definitely not.