Subprime Auto Defaults are Soaring

Posted on August 02, 2017 by Laura Lam

auto defaults 2017

It’s classic subprime: hasty loans, rapid defaults, and, at times, outright fraud.  Only this isn’t the U.S. housing market circa 2007. It’s the U.S. auto industry circa 2017.  A decade after the mortgage debacle, the financial industry has embraced another type of subprime debt: auto loans. And, like last time, the risks are spreading as they’re bundled into securities for investors worldwide.  In July, 90-day auto loan delinquency rates eclipsed 3.8%, their highest levels since the financial crisis.

Subprime car loans have been around for ages, and no one is suggesting they’ll unleash the next crisis. But since the Great Recession, business has exploded. In 2009, $2.5 billion of new subprime auto bonds were sold. In 2016, $26 billion were, topping average pre-crisis levels, according to Wells Fargo & Co.

In recent years, lending practices in the subprime auto industry have come under increased scrutiny. Regulators and consumer advocates say it takes advantage of people with nowhere else to turn.  For investors, the allure of subprime car loans is clear: securities composed of such debt can offer yields as high as 5%. It might not seem like much, but in a world of ultra-low rates, that’s still more than triple the comparable yield for Treasuries. Of course, the market is still much smaller than the subprime-mortgage market which triggered the credit crisis, making a repeat unlikely. But the question now is whether that premium, which has dwindled as demand soared, is worth it.  “Investors seem to be ignoring the underlying risks,” said Peter Kaplan, a fund manager at Merganser Capital Management.

Asset-backed securities based on auto loans are engineered to keep paying even when some loans sour. Still, some cracks have emerged in the $1.2 trillion market for auto financing. Delinquencies have picked up, as have losses on subprime loans. Auto loan fraud, meantime, is approaching levels seen in mortgages during the bubble.Auto finance “is not going to bring down the financial system like the mortgage crisis almost did, but it does signal more stress with the consumer,” said Stephen Caprio, a credit strategist at UBS Group AG.

Source: Bloomberg

Small Business Borrowing Hits 2 Year High

Posted on August 01, 2017 by Laura Lam

June 17 small biz lending indexBorrowing by small U.S. companies hit a nearly two-year high in June, driven by restaurants and hotels, PayNet Inc said on Tuesday, as businesses invested to meet customer demand.  The Thomson Reuters/PayNet Small Business Lending Index for June rose to 139.9, its highest since July 2015, from an upwardly revised May reading of 138.3.

Small business borrowing is a key barometer of growth because those companies do much of the hiring that drives economic gains.  Still, measured from a year earlier, borrowing was flat, according to the provider of credit ratings on small companies.

“It really tells me they are still seeing a lot of uncertainty from policy,” said PayNet founder and Chief Executive Bill Phelan, referring to the lack of annual growth in borrowing. “If you don’t know what policies are going to be, you are not going to put money to work.”

Turmoil in Washington surrounding U.S. President’s Donald Trump’s 6-month-old administration has led investors and businesses to question whether many his proposals will be implemented. Last week Republicans failed to deliver on a campaign promise to overhaul the U.S. healthcare system, and Trump on Monday fired his communications director after just a week on the job.

Borrowing by firms providing food and accommodation rose 5.5% from a year earlier, Phelan said. But that growth was offset by declines in other sectors, including a 12% drop by healthcare-related companies.  Movements in the index typically correspond with changes in gross domestic product growth a quarter or two ahead. The U.S. economy grew at a 2.6% annual pace in the second quarter, more than double the 1.2% growth in the first quarter, though wage growth has continued to be sluggish.

A separate barometer of small companies’ financial health suggested companies are finding it easier to pay off old loans. The share of loans more than 30 days past due was 1.67% in June, down from 1.69% a month earlier, PayNet data showed.

Source: Fiscal Times

Negative Equity Continues Slow & Steady Decline

Posted on July 31, 2017 by Laura Lam

zillow negative equityThe U.S. negative equity rate – the share of all homeowners with a mortgage that are underwater, owing more on their home than it is worth – fell to 10.4% in the first quarter of 2017, the 20th straight quarterly decline. But the speed at which negative equity is falling has slowed dramatically.

The national negative equity rate fell from 10.5% at the end of 2016 and 12.7% in Q1 2016, leaving slightly more than 5 million Americans with a mortgage underwater. The rate is down substantially from its peak of 31.4% in Q1 2012, when more than 15.7 million Americans were in negative equity. But while the market has come a long way over the past few years in ridding itself of negative equity, progress is starting to slow.  The 0.1%age-point quarterly drop between Q4 2016 and Q1 2017 negative equity was the smallest since a barely noticeable drop from Q3 2014 to Q4 2014.

One reason for the slowdown is because the bulk of those homeowners that remain in negative equity are very deep underwater – 56.7% of those in negative equity were underwater by more than 20% as of the end of Q1. In addition to paying off a loan over time, the surest way to get out of negative equity is to wait for a home’s value to appreciate enough to bring it into positive equity. Home values grew at a robust annual pace of more than 7% in Q1, well above historically “normal” annual home value growth of 3% to 5%. Even so, it would take several years of growth at that rate to free a homeowner underwater by 20% – to say nothing of the roughly 15.1% of underwater homeowners who owe twice or more what their home is worth.

Among the nation’s 35 largest metro markets, the highest effective negative equity rates are in Virginia Beach (41.5%), Las Vegas (34.8%) and Baltimore (32.7%). The lowest rates of effective negative equity among large metros as of the end of 2016 were in San Jose (6.3%), San Francisco (8.3%) and Portland (10.9%).

Source:  Zillow/Builder

Mortgage Delinquencies Continue to Decline

Posted on July 27, 2017 by Laura Lam

loan performance 7-17Mortgage delinquencies dropped in April and the economy continued to show improvement, according to the latest Loan Performance Insights Report from CoreLogic.  Nationally, mortgages in some stage of delinquencies, those that are 30 days or more past due including those in foreclosure, dropped to 4.8% of total mortgages in April. This is a decrease of 0.5 percentage points from last year’s 5.3%.

The foreclosure inventory rate, which measures the share of mortgages in some stage of the foreclosure process, decreased to 0.7%, down from April 2016’s 1%. The serious delinquency rate, defined as 90 days or more past due including loans in foreclosure, also decreased, dropping from last year’s 2.6% to 2% this April.

“Most major indicators of mortgage performance improved in April, showing that the market continues to benefit from improved economic growth and home price increases,” CoreLogic Chief Economist Frank Nothaft said. “While overall performance is improving, it reflects the older legacy pipeline of loans that continue to heal, especially in judicial states which typically take longer to clear out,” he added.

Early-stage delinquencies, mortgages 30 to 59 days past due, increased slightly to 2.2%, up from 2% in April last year. The chart above shows loan performance across all loan types.

“Delinquency rates are down virtually across the board as the rebound in the U.S. housing market continues to gather steam,” CoreLogic President and CEO Frank Martell said. “It appears likely that delinquency rates will continue to fall for some time, but at a moderating pace.”

Source:  CoreLogic, HousingWire

Foreclosure Filings Down 20% from Year Ago

Posted on July 26, 2017 by Laura Lam

attom data foreclosures 7-2017According to ATTOM Data Solutions’ Midyear 2017 U.S. Foreclosure Market Report the total number of U.S. properties with foreclosure filings during the first half of the year decreased by 20% from the previous year to 428,400, and down 28% from the first half of 2015.  While the amount of foreclosures decreased nationally, 7 states – Texas, Illinois, Connecticut, Oklahoma, West Virginia, Montana and North Dakota – and D.C. saw increases.

ATTOM Data Solutions says that default notices, scheduled auctions or bank repossessions were lower in almost all areas but 8 areas saw an increase, led by a 60% rise in the District of Columbia.

“With a few local market exceptions, foreclosures have become the unicorns of the housing market: hard to find but highly sought after,” said Daren Blomquist, senior vice president with ATTOM Data Solutions. “More than 38% of properties sold at foreclosure auction in the first half of this year went to third-party buyers rather than back to the bank — the highest share we’ve ever seen going back as far as 2000, the earliest this data is available.”

The highest state-rate of foreclosure filings was in New Jersey, where 0.99% of housing units had a filing compared to the national rate of 0.32%. Delaware, Maryland and Illinois all had rates above 0.50%.  For foreclosure starts, 203,875 homes entered the process, down 20% from a year ago and the lowest 6-month figure since the second half of 2005, the earliest data available.

Mortgage lenders foreclosed on 169,124 homes, down 14% year-over-year and the lowest 6-month figure since the second half of 2014.

Source: RealtyTrac/Attom Data Solutions/Builder

Rate Hike Prevented 1 Million Americans From Paying Mortgage

Posted on July 25, 2017 by Laura Lam

transunion survey July 2017A new analysis from TransUnion found that 10.6 million Americans could struggle to absorb their increased monthly payments after the Federal Reserve Board raised interest rates in December, however further examination showed only 1 million struggled with being delinquent after the rate hike.

TransUnion’s study identified 63 million consumers who carried debts where the minimum monthly payments was tied to the market interest rate, and would be effected by rate hikes. Using its CreditVision aggregate excess payment algorithm, TransUnion found that 10.6 million consumers were at an elevated risk of not being able to absorb the 0.25% rate hike.

The average change in monthly payments was an increase of $18 after the December rate hike, according to TransUnion. Despite the low amount, it created a challenge for 1 million consumers who were delinquent in their mortgage payment by the end of March.

“We’re pleased to see that only 10% of those consumers we had considered at elevated risk of payment shock from a rate increase exhibited delinquency over the study period,” said Ezra Becker, TransUnion senior vice president of research and consulting. “Most consumers appeared able to reallocate their available cash, or make small changes to their spending habits, to effectively absorb the December rate increase.”

Back in September, TransUnion released a study that showed the rate hike could cause a payment shock for 9 million borrowers.  However, TransUnion cautioned consumers and lenders, saying while this study showed only 1 million consumers were impacted in the first quarter, it did not examine long-term impacts of a rate hike. For example, many consumers could be dipping into their savings accounts to meet the new obligations, and could eventually exhaust that source of funds.

“It is important for both lenders and consumers alike to be cognizant that a rising-rate environment presents a different dynamic than a steady-state or falling-rate environment,” said Heather Battison, TransUnion vice president of consumer communications. “For lenders, a rising-rate environment does present the risk of default due to payment shock.”

Source:  TransUnion/Housing Wire

Mortgage Credit Availability at Highest Level since 2016

Posted on July 21, 2017 by Laura Lam

lending 1

Credit availability remained historically tight in the first quarter of 2017, but increased slightly from the previous quarter to the highest level since 2016.  The Housing Credit Availability Index (HCAI)  from the Housing Finance Policy Center shows mortgage credit availability increased to 5.4 in the first quarter. This is up from 5.2 in the fourth quarter.  However the chart, which uses data from eMBS, CoreLogic, HMDA, IMF and the Urban Institute, shows this is still extremely tight compared to historical standards.

The HCAI measures the percentage of home purchase loans that are likely to default, go unpaid for more than 90 days past their due date. A lower HCAI indicates that lenders are unwilling to tolerate defaults and are imposing tighter lending standards, making it harder to get a loan. A higher HCAI indicates that lenders are willing to tolerate defaults and are taking more risks, making it easier to get a loan.

Credit availability at Fannie Mae and Freddie Mac remains at the highest level since its low in 2011. However, both the government channel and portfolio and private-label securities channel continued to stay close to or at the record low for the amount of default risk taken. The government FVR channel includes the Federal Housing Administration, the Department of Veterans Affairs and the Department of Agriculture Rural Development programs.

ECredit riskarlier this summer, Fannie Mae raised its debt-to-income ratio requirement to further expand mortgage lending.  A new survey from Fannie Mae shows lenders are suddenly ready to begin loosening credit this year as mortgage demand weakens.  The chart shows that while the government-sponsored enterprises are increasing the risk they take on, it is still low by historic measures.

The Urban institute pointed out there is still plenty of space to expand the credit box. If the current default risk doubled across all channels, risk would remain within the standard 12.5% seen in the 2001 to 2003 mortgage market.

Source:  Housing Wire

Homes Prices and Competition Hit Record High

Posted on July 19, 2017 by Laura Lam

redfin home salesThe U.S. housing market continued to accelerate in June, with both the median prices and speed of home sales hitting all-time highs, according to a recent Redfin report.  Nationwide, the median sales price rose 7.3% year-to-year to $298,000 in June, the highest price on record since the firm began tracking in 2010. Homes typically sold within 36 days of when they were listed, marking the fastest pace in 7 years, according to Redfin.

The tightening of the housing market reflects the imbalance between a long-standing inventory shortage and surging demand.  “Month after month, new records are set for the pace at which homes are going under contract. Demand continues to swell while supply troughs,” said Nela Richardson, chief economist at Redfin.

Other major findings from the Redfin report include:

  • Home sales increased 1.9% year-over-year to 308,800; 10 out of 89 metro areas saw double-digit increase in sales
  • Nationwide, new listings fell 2.7% from a month ago
  • Listings stayed on the market for an average 36 days, 6 days shorter than a year ago
  • Denver, Portland and Seattle were the fastest-moving markets – typical homes entered into contract in just 7 days
  • More than a quarter of homes across the country sold above asking price. The most competitive market was San Jose, California, where 73.7% of homes sold above list price, followed by 70.6% in San Francisco
  • Fort Lauderdale, Florida, had the nation’s highest price growth, rising 15.6% year-over-year to $260,000

In June, the number of homes available for sale dropped 10.7% to 786,000, with new listings at 352,500, matching the volume of last year but falling 2.7% from May. At the current rate of consumption, this translates into a 2.5-month inventory, the lowest supply on record since 2010.  Generally, 6 months of supply represents a market balanced between buyers and sellers, according to Redfin. Anything less favors sellers, anything more favors buyers.

Meanwhile, buyers bid competitively for limited housing stocks. More than 82,140 homes, or about 26.6% of all homes sold in June, fetched higher sales price than asking, according to Redfin.

Source:  Redfin/Mansion Global

Reputation Survey: Regional Banks Rise to the Top

Posted on July 18, 2017 by Laura Lam

bank ratings 2017 smallThe 2017 survey revealed that the banking industry overall extended its multi-year reputation recovery among U.S. consumers, achieving a reputation score that qualified as “strong” (above 70 on a 100-point scale) for the first time since the Survey of Bank Reputations began in 2011.

Better delivery of products and services has helped, as has looser lending practices. But the biggest influence has been banks’ behavior.  Simply put, banks are acting more responsibly with customers – no longer processing transactions in a way that will more quickly trigger overdrafts, for example. They also are making their community activities more prominent. And these efforts are paying off in higher reputation scores.

Of the 39 banks evaluated in this year’s survey, more than 50% received “excellent” marks from their existing customers, up from just under a third of the banks in the 2016 survey. Perhaps more tellingly, over 30% received “strong” ratings from non-customers, versus zero in last year’s survey.

Stephen Hahn-Griffiths, an executive vice president at the Reputation Institute, said that while providing quality products and services is obviously important, it’s a company’s governance – or how it conducts business – that can make or break a reputation these days.

Whatever the reason, banking now has moved ahead of some other industries that had it beat last year, including the health care and energy sectors. Banking also moved ahead of the broader finance industry, which scored a 69.  Across the 17 industries the Reputation Institute tracks, consumer goods had the strongest reputation, with a score of 76.5, and energy the weakest, with a score of 59.7.

bank ratingsWithin the banking industry, the regionals are faring particularly well: 8 of the 10 highest-scoring banks in the overall ranking have less than $50 billion of assets. The survey rates banks in seven categories: products and services, innovation, leadership, workplace, performance, citizenship and governance.

Which categories most heavily influence people’s perceptions of banks can shift from one year to the next, and the 3 categories that proved to be the top reputation drivers this year are governance, followed by products and services, then innovation.  “The number one thing people are looking for in terms of reputation of a bank is ethical behavior,” said Hahn-Griffiths.  A strong reputation can pay off in myriad ways, influencing people’s willingness to buy products from, invest in and even work for a company, according to the Reputation Institute’s research.

Source: American Banker