Lenders may have learned their lesson from the financial crisis as lending to low-credit borrowers continues to decline.
According to analysts at Credit Suisse, debt being taken on by American households has increased since its trough in 2013, but subprime debt — debt taken on by people with poor credit and one of the leading causes of the recession —
has declined since that time.
Household debt from mortgages, home equity lines, credit cards and auto loans has increased $US500 billion since its low point.
That’s actually good news since increasing debt means Americans feel secure in borrowing money to make large purchases.
From a risk management perspective, it’s also good news that subprime borrowing has continued to decrease as a percentage of all debt. Before the Recession, subprime lending made up over 1/5th of all outstanding household debt, 21.4%. Now it sits at 15.6%, down even from the mid-2013 debt trough where it was 16.5%.
big subprime storyline of the recession was mortgages, which contributed to thousands of foreclosures. Since Q2 2013, as debt has increased, the amount of money owed on subprime mortgages has dropped by over $US50 billion. The report notes that the primary reason for the decrease in subprime debt is”due to slow-grinding charge-offs from completed foreclosures.”
The one area where subprime loans are outpacing their safer counterparts is student loans. Student loans have garnered a lot of attention, passing credit cards in recent years as the second-largest source of debt for consumers. Credit Suisse notes that student loans were the only kind of debt that did not decrease during the Recession and subprime student loans now account for $US100 billion more than prime, whereas they were equal as recently as 2009.
This growing size of student loans also has contributed to the outpacing of government lending over private banks. Since 2008, the Federal Reserve and other government agencies hold $US2.7 trillion in household debt up from $US200 billion in 2007, much more than the approximately $US200 billion lent from traditional private banks.
The decrease in subprime debt shows that many lenders are still wary to repeat the mistakes that lead up to the Recession, but debt watchers have a new source of worry in risky student loans.
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