With a 1.5% increase in short-term interest rates in a three month period, the mortgage refinancing party is effectively over. Yet, total household debt (including mortgage loans) increased by $266 billion in the first quarter 2022. Balances, now at $15.84 trillion, are $1.7 trillion higher than they were before the pandemic began.1
That being said, consumer credit demand as indicated by the number of credit inquiries was down over 5% from the third quarter 2021. Consumers also paid down credit card debt on the first quarter 2022. These two phenomena reinforce the Federal Reserve’s June Beige Book, which indicated that consumers in many regions of the US are beginning to show “increased signs of price sensitivity”.
The Beige Book is peppered with phrases like: “rising prices”, “recession fears”, “escalating costs”, “growth deceleration”, “downward pressure”, “economic uncertainty”, deteriorating financial conditions”, “wage and price increases”, “less optimistic outlook”. These are the opinions of business people who have a good idea of local sentiment.
So far the amount of consumer debt transitioning into the past due or delinquent columns remains low, but it is beginning to climb. We reported on banks we are watching for signs of strain in residential real estate in “Bubble, Bubble, Toil and Trouble” JRN 39:15 and with other consumer loans JRN 39:23 “Can Consumer Loans Withstand Rate Rises”. This week we will look at all consumer loans.
The banks listed on page 7 all reported a 10% or greater year over year increase in total loans (March 31, 2021 to March 31, 2022). They also have a loan to deposit ratio of 50% or greater. And, at least 75% of their loan portfolio is in the form of consumer loans, whether for home mortgages or other consumer loans (auto, credit card, etc.).
Betting on the U.S. consumer is generally a very safe bet. But there are a lot of factors at play right now that are outside of the individual’s control. Inflation is a big one. Rising interest rates is another. And, it appears we will have both the rising costs of inflation and the rising costs of credit with us for the foreseeable future.
Ten of the banks on page 7 have no residential real estate at all. Six of them are credit card banks (highlighted in yellow). So far, at least, these credit card banks are not showing any signs of stress. In fact, most of the banks listed are doing quite well, so far.
3½-Star First National Bank of America, East Lansing, MI, is one showing some weakness. With assets of $3.457 billion and capital of $309 million, First NB of America’s leverage capital ratio (CR) is 9.27%. Its tier 1 risk-based CR is 16.54% and total risk-based CR is 17.8%. But as we all know, residential real estate is considered to be one of the least risky investments, unless we’re facing a recession, or a bubble, or both.
Of FNB America’s total loans, $3.010 billion is secured by single family residential first liens. Another $20.119 million is secured by residential junior liens and $38.413 million is secured by multi-family (5 or more) residential property. That constitutes over 95% of FNB America’s $3.217 billion loan portfolio. Other loans to consumers are relatively insignificant as they add up to just $3.28 million so let’s concentrate on the real estate portion.
At the end of 2021, FNB of America’s past due single family loans looked like:
| Secured by single (1-4) family residential real estate
(Dollars in thousands) |
30-89 days past due | 90+ days past due | Non-accrual |
|
Revolving lines (1-4 family) |
173 | 0 | 110 |
| Closed-end first lien (1-4 family) | 19,248 | 145 | 36,043 |
| Closed-end junior lien (1-4 family) | 49 | 0 |
496 |
This is just 3 months later:
| Secured by single (1-4) family residential real estate
(Dollars in thousands) |
30-89 days past due | 90+ days past due | Non-accrual |
| Revolving lines (1-4 family) | 21 | 0 | 287 |
| Closed-end first lien (1-4 family) | 28,710 | 356 | 37,596 |
| Closed-end junior lien (1-4 family) | 22 | 0 | 396 |
Delinquencies to assets remain below 1.5%, but total delinquencies jumped $3.5 million.
1 Federal Reserve Bank of New York’s Quarterly Report on Household Debt and Credit.