Is the Sub-prime Market Growing?

Sub-prime origination growth across all lending sectors continues with notable increases, according to recent U.S. consumer data from Equifax’s March National Consumer Credit Trends Report and CreditForecast.com, a joint product of Equifax and Moody’s Analytics.

The report shows origination growth across multiple vertical markets through 2011. The number of bank credit card accounts increased from December 2010 to December 2011, a product of lenders more aggressively seeking new customers and consumers increasing demand for new credit.

Total consumer debt in the U.S. currently stands at $11 trillion, a decrease of 11 percent from its peak in the fourth quarter of 2008 at $12.4 trillion. The drop is driven by a nearly 12 percent dip in home financing balances, which fell from $9.8 trillion in 2008 to $8.7 trillion in February 2012. Non-mortgage and non-student consumer debt balances also fell sharply (22 percent) from the early 2008 peak of $2.05 trillion. After reaching a post-recession low of $1.60 trillion in May 2011, consumer debt balances have risen about two percent.

New credit in 2011 ($782 billion) remained below pre-recession levels, but gained more than 10 percent over 2009 and 2010 levels ($695 and $709 billion, respectively). Increases in credit limits were also seen in 2011, as total retail credit card limits increased six percent year-over-year from December 2010 to December 2011 and total bank credit card limits jumped 24 percent from December 2010 to December 2011. Consumer finance credit limits also saw a comparatively modest improvement of $1.2 billion from December 2010 to December 2011.

“The evidence of increased lending to sub-prime consumers demonstrates banks’ ongoing efforts to grow lending by providing credit opportunities to more consumers,” said Equifax Chief Economist Amy Crews Cutts. “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.”

Other notable findings from Equifax’ March Credit Trends Report include:

• Consumer finance: New consumer finance loans originated in 2011 (20.2 million) were up over four percent from 2010 (19.4 million), and the highest since 2008 (24.8 million). Consumer finance delinquency rates are on the decline, dropping to seven percent in February 2012, the lowest level since July 2007. From 2007 to 2010, consumer finance loan originations were falling, but the trend reversed in 2011, with $1.2 billion of new loan amounts added. New consumer finance originations for the month of December reached $5 billion in 2011; the last time December originations were that high was in 2008 ($5.1 billion). Consumer finance loans have typically served high–risk consumers, but in February 2011, low-risk borrowers became dominant in the segment; as of February 2012, just over 33 percent of consumer finance loans (by dollars) were to high-risk borrowers while 39 percent were to low-risk borrowers.

• Bank credit cards: Lending to sub-prime consumers showed a 41 percent increase from 2010 to 2011 as sub-prime borrowing hit a four-year high in December 2011 with 1.1 million new bank credit cards issued. New sub-prime card limits grew 55 percent from 2010 to 2011. At $12.5 billion in 2011, bank card limits are at their highest level since 2008 ($27.4 billion). Bank credit card growth continues, but is still well below pre-recession levels. In 2011 39.9 million bankcards were opened, an 18 percent increase from 2010 and the highest total since 2008. The increase in total bank credit card originations was accompanied by a 31 percent rise in total credit limits from 2010 to 2011. They year 2011 marked the first time in more than four years that credit lines increased, reaching $163 billion.

• Retail credit cards: In early 2009, the share of retail card balances held by low-risk borrowers started increasing markedly. Today, low-risk borrowers hold just below 42 percent of retail card balances, followed by high-risk borrowers who now make up nearly 26 percent of balances outstanding. From 2010 to 2011 there was a 4.7 percentage point increase in retail card originations to sub-prime borrowers, making up 31 percent of 2011 retail credit card originations. Retail credit card limits grew nearly six percent in 2011, totaling $60 billion for newly originated cards. New retail card tradelines in December 2011 showed a four percent increase over the same month a year ago, adding 4.2 million new accounts. The decline in total retail card limits appears to be nearing a bottom as delinquency rates and write-offs show continued declines.