7/7/2010
By David Silver, Research Analyst

The American Bankers Association (ABA) indicated that consumer delinquencies declined to its lowest level since the first quarter of 2002.  Over the past five quarters, credit card delinquencies (the percentage of accounts that are more than 30 days delinquent) have been steadily declining.  This points to a few possible reasons: 1) Americans are still scorned from the economic meltdown and have tried to spend only what they had, using either cash or debit cards.  2) Americans are worried about the future and have cut back on the spending, and if they are lucky enough to have a job, they are using that income to pay down the debt that has accumulated over the past few years.  Both of these options have a positive underpinning, basically improving the balance sheet of the common consumer; however, it could spell a slower recovery.

When the housing market was at its worst, there were thoughts that the next shoe to drop would be the auto loans that went sour.  While delinquencies surged during the first quarter of 2009, they have since leveled off. The following chart outlines the delinquencies for direct auto loans.  Direct auto loans are given from a bank directly to the consumer, while indirect auto loans are where a car dealership acts as an intermediary between the bank or financial institution and the consumer.The decline has given a more predictable cash flow to automakers, which have used the government and company incentives from the past few months to fuel a rebound from the doldrums of the beginning of 2009.  That being said, the economy is supposed to be that much better than the first quarter of 2009, however, home equity loans are still seeing a higher percentage of delinquencies that in the first quarter of 2009 (so much for all those housing programs keeping people constant on their payments and in their homes). 

The following chart outlines indirect auto loans, and notice that there is a month delay between the spike in indirect auto loans to direct auto loans.  This can be attributable to those that need the dealership to act as an intermediary have a higher credit risk and will be the first to default if economic times worsen.  However, in the most recent quarter, indirect auto loans saw a significant drop and are actually approaching the levels seen before the financial meltdown.  This is a good sign for the automakers, but could also be a ramification from the massive amounts of recall and incentives that the automakers had to offer to spur sales during the first three months of the year.  The first three months of 2010 is when Toyota (TM) recalled almost 9 million vehicles around the world, and in an effort to spur sales, all auto makers had to follow Toyota's lead and offer incentives.  While the economy is far from out of the woods, it does appear to be improving. 

According to a Fitch Ratings, Delinquencies and losses on U.S. prime auto loan asset-backed securities reached their lowest level last month in nearly three years, mainly due to seasonal factors.  Fitch's prime annualized net loss index improved by 17% to 0.87% in May from the prior month, the fourth consecutive drop. The annualized net loss was nearly 50% down from a year ago, and the lowest rate recorded since August 2007. Fitch, which tracks about $55.3 billion worth of prime and subprime auto loan ABS, also reported the index for prime-rated loans delinquent at least 60 days held steady in May at 0.51%. That figure was 30% lower than a year ago and the lowest level since June 2007.   Both the Fitch data and the ABA data could be a seasonal drop and one that is directly related the improving economy in the first three months of the year, however, the economic data over the past few weeks has pointed to a souring (or a slower growth) for the economy in the second quarter.  The first quarter is also when the majority of the stimulus money was scheduled to hit the economy, and with an increase of tax rebates (both income and housing tax credits), the economy saw a jump in response. 

The last time that delinquencies were this low was the first quarter of 2002.  Looking at the following chart, the few months following this report were difficult for the stock market.  There are many eerie similarities between now and then.  Problems in Europe caused a recession in the United States from 2002-2003.  After rebounding from the dark days following 9/11, the market took another dive during the second and third  quarter of 2002.  This time around, following the near collapse of the financial system, stocks rebounded on March 8, 2009 for more than a year, but now that rebound is looking weak and the dreaded "double-dip" recession has begun to circulate again.  I don't think we ever left the first one, but that's another story.

What does it mean for the economy looking forward?  Americans are paying down debt, and while it will improve the common American's balance sheet, small businesses and consumers are having trouble accessing credit.  Delinquencies and joblessness are closely correlated, now that the next round of jobless benefits is expiring, does that allude to another round of delinquencies?  Consumers that have been out of work for the past six months are now losing benefits and could cause another bout of delinquencies in personal loan or home equity line of credit or even in the property improvement area. Hopefully too many Americans didn't try to capitalize on the slight savings to "winterize" their homes if they couldn't afford to be living in it. 

David Silver
Wall Street Strategies