We’re at the point in the credit cycle when lenders and borrowers can get into trouble.
The typical pattern is that lenders looking to keep loan balances climbing loosen up on lending standards and extend more credit to less qualified customers just as a slowing economy threatens the ability of these creditors to pay.
See the subprime mortgage crisis that began in 2007 for the playbook.
That particular crisis is still so fresh in lenders’ minds (I hope) that I think it’s unlikely that the mortgage market will be the locus of the next blow-up.
It’s likely to show up somewhere else in the lending ecosystem.
One place I’m watching right now is the credit-card market where lenders big and small look to be extending more credit to consumers with less-than-stellar credit ratings.
In the third quarter U.S. credit-card balances surged 19% to a record $866 billion, according to TransUnion. Average credit lines also climbed to an all-time high. The jump looks to have been linked to a big increase in card originations to subprime consumers. Originations–that is newly issued cards–climbed more than 12% in the previous quarter. This increase erases the pullback on credit card marketing and originations during the Covid econ comic slowdown.
Credit card holders look to be using home equity loans to pay down more costly credit card debt. The number of new home-equity lines of credit surged almost 50% in the quarter to 409,110. Homeowners are sitting on a combined $604 billion in non-mortgage debt, according to TransUnion.