by Andrew Haughwout, Donghoon Lee, Joelle W. Scally, and Wilbert van der Klaauw – Liberty Street Economics, Federal Reserve Bank of New York
Today, the New York Fed released the Quarterly Report on Household Debt and Credit for the second quarter of 2014. Aggregate debt was relatively flat in the second quarter as housing-related debt shrank, held down by sluggish mortgage originations. But non-housing debt balances increased across the board, with especially strong gains in auto loans. Auto loan balances, which include leases, have increased for thirteen straight quarters, and originations have not been this high since the third quarter of 2006. The Quarterly Report and the following analysis are based on data from the New York Fed’s Consumer Credit Panel, a nationally representative sample drawn from anonymized Equifax credit data.
Once again, news reports are pointing to a boom in subprime auto lending, and the concerns raised by such a boom and its associated risks have prompted a Justice Department investigation. Last year, amid similar stories, we published the post “Who Is Driving the Auto Lending Recovery?â€Â which showed that 23 percent of auto loans were originated by borrowers with credit scores below 620. This share, though significant, is still lower than the 25 to 30 percent share seen during the years preceding the Great Recession. We’ve now revisited these statistics, and find again that the share has increased only slightly since 2010 (see ourinteractive charts).
So what has all the fuss been about? The small increase in the share masks the fact that the subprime auto lending market has grown substantially over the last several years, as the chart below shows.
Since the trough in 2009:Q4, balances have risen across the board, but the growth has been most pronounced among the riskier groups, which also experienced the most severe contraction during the credit crunch of 2007-09. The dollar value of originations to people with credit scores below 660 has roughly doubled since 2009, while originations for the other credit score groups increased by only about half. These gains in origination volumes reflect an increase in the average size of the loans more than an increase in the number of loans.
