Monthly Snapshot of US Household Credit Conditions

Actual	0.4%
Previous (Before any revisions)	1.2%
Coverage	Feb. 2015
Updated	Mar 20, 2015 1:00 PM*

First Take

Total U.S. household borrowing growth inched up slightly to 0.4% y/y in February after a pause in January. Auto lending continues to lead the way, with banks remaining more aggressive than finance companies. Bankcard borrowing increased 4.1% y/y. First-mortgage outstanding balance is trending up slowly. U.S. lenders added only $13 billion in first mortgage loans to their balance sheets. The total delinquency rate was flat at 3.6%, near its cyclical low. Total annualized write-offs and bankruptcies edged up slightly to 1.4%, still close to their cyclical low as well.

The Numbers

• U.S. households added a net $64 billion to their liabilities since December, an amount consistent with the economy’s strength and broadly reflecting confidence in the job market. All consumer loan segments are contributing to growth.

• Total first-mortgage balances rose a net $14 billion in two months. First-mortgage borrowing is rising gradually as the housing recovery struggles to gain momentum. Mortgage refinancing remains depressed. Mortgage prepayments in CreditForecast are running near $70 billion, nearly half of what they were before the rate shock in 2013.

• Auto loans continued to grow by double digits. U.S. banks’ auto loan portfolios reached an all-time high of $473 billion, $133 billion more than before the recession. Finance companies’ auto loan portfolios increased to an all-time high of $485 billion, surpassing their prerecession high by $15 billion.

• The total outstanding balances of bankcards rose by 4.2% year over year in January and February, the fastest rate of growth in six years. Home equity loan balances are still falling but more slowly, dropping 3.4% year over year. The decline is faster in installment loans than in revolving loans.

• The total dollar delinquency rate is hovering above the prerecession low as lenders still work on bad first-mortgage loans from the housing downturn. The dollar delinquency rate on first mortgages has been flat at 3.5%, 1 percentage point above the housing boom years, for nearly a year.

• The dollar delinquency rate on auto loans declined slightly to 3.3% but remained flat at 2.6% in the bankcard segment. In both segments, delinquency rates are at cyclical lows. The dollar delinquency rate on home equity loans is trending down but is still above the prerecession low.

• The sum of annualized write-offs and bankruptcies on all loan segments ticked 13 basis points higher to 1.44%, with all segments contributing to the growth except student loans.

Source: Equifax and Moody's Analytics

Behind the Numbers

Consumers, businesses and lenders are benefiting from the strengthening economy, and credit conditions are improving. Lending is rebounding, and credit is being offered to a wider spectrum of borrowers in many loan segments. Banks are well-capitalized and looking for opportunities to lend now that they have put large losses behind them, but the pace of normalization in lending standards will be moderate because of increased regulations and higher capital standards. A gradual loosening of lending standards will push delinquency rates up in coming quarters, but strong payroll growth and rising incomes will prevent delinquency rates from surging in the short run.

Even though consumers increased spending at a healthy pace last year, they have been unable to lead the economy as they did in previous recessions. The main reason has been tight credit and lack of income growth. However, wage income is showing signs of improvement, and lenders are opening the credit spigot to borrowers with a less than perfect credit history. A tighter labor market will cause quicker income growth eventually, and lenders will feel more comfortable about borrowers’ ability to remain current on their liabilities.

Borrowing will surge in all consumer credit segments. Longer-term rates are historically lower than what they should be given the U.S. economy’s growth path. Lower inflation expectations are keeping long-term rates down, but much depends on how the Fed manages monetary policy normalization. Risk aversion created by a sharp rise in interest rates remains the biggest risk to consumer credit.