Data from Equifax and Moody`s Analytics shows that sub-prime lending is up across all sectors this spring, another sign that the economy is in recovery from the long recession. Combined with continuing news of downward-creeping unemployment rates, it looks like a season of hopeful financial forecasts.
What do the numbers look like?
In 2011, there was $728 billion issued in new credit; still below pre-recession levels but a greater than 10% gain over 2010 and 2009 numbers. Total credit card limits jumped 6% from December 2010 to December 2011 and consumer credit limits improved by a more modest $ 1.2 billion. Credit card limits for retail cards were up by almost 6% in 2011, with $60 billion total in new card originations. Delinquency rates and write-offs showed continued declines.
These good-looking numbers might be leading lenders to let down their guard and open up the gates for the sub-prime borrower.
Sub-Prime Borrowers Ready for their Close-Up
The term “sub-prime borrower” is really just a fancy name for folks who don`t have great credit history – the consumer carrying heavy debt, your neighbor who went through foreclosure, you sister who filed for bankruptcy. These people are considered a greater credit risk because they are more likely to default on their debts. When banks are ready to take risks on them again, it`s a good sign for the economy. Ina weak economy, lenders are reluctant to take risks on sub-prime borrowers, but when it gets stronger, they tend to throw caution to the wind.
From 2010 to 2011, lending to the sub-prime population grew by 41%, hitting a four-year high in December 2011. New sub-prime card limits were up 55% and bank card limits are sitting at their highest level since 2008, at $12.5 billion.
On and Off the Lot
When it comes to new car loans, sub-prime borrowing is up as well, with sub-prime loans accounting for over 46% of the market in the auto finance segment. While prime borrowers still make up 83% of auto bank origination loans, they have lost share to sub-prime borrowers over the past two years.
Hit the Books
People looking for student loans are usually young, with limited credit history and limited income. Because of this, student loans are almost exclusively the domain of high-risk borrowers. In December 2011, almost 66% of new student loans were held by sub-prime borrowers. In total outstanding loan balances – which includes longer-term loans by people who are long past their student days but still paying off loans – low-risk borrowers dominate, but they are losing share to higher-risk borrowers, who account for almost 35% of outstanding balances.
Back in early 2009, retail credit card balances held by low-risk borrowers increased as the economy foundered and sub-prime borrowers struggled to secure new lines of credit. Now, high-risk borrowers make up nearly 26% of outstanding balances and low-risk borrowers hold about 42% of retail card balances. There was a 4.7 percentage point increase in new retails credit card originations to high-risk borrowers from 2010 to 2011.
Amy Crews Cutts, Chief Economist at Equifax said, “The evidence of increased lending to sub-prime consumers demonstrates banks` ongoing efforts to grow lending by providing credit opportunities to more consumers. Year-over-year results show borrowers are taking advantage of the new opportunities and seeking to diversify their financial activity, which is building momentum toward economic improvement.”