TransUnion: Subprime Market Grows as Credit Market Strengthens

TransUnion, New York, said despite slowing mortgage originations, the U.S. home lending market is showing other signs of recovery, with delinquencies dropping every quarter since 2009.

The company’s Q3 Industry Insights report also noted the subprime risk tier saw modest origination growth of 3.4% year-over-year, representing the largest volume of subprime loans originated in the second quarter post-recession. Average debt per borrower rose to $205,782, and average balance of new mortgages reached $230,000.

The report said mortgage originations decreased by 0.4% year-over-year, continuing a trend of declining originations since Q2 2017. Delinquencies declined to 1.7% in Q3 2018, compared to 1.9% a year ago, largely driven by drops in the near-prime risk tier, where delinquencies dropped by 15% year-over-year and the subprime risk tier, which declined 9% year-over-year.

Of the largest metros measured, Seattle, New York and Boston experienced the largest decline in delinquencies and Houston, Dallas, and St. Louis experienced the smallest decline in delinquencies.

“The decline in mortgage originations is likely the impact we’re seeing from a combination of rising interest rates, steep home prices appreciation and limited starter home supply,” said Joe Mellman, On the refinance side, as interest rates rise, many consumers will no longer have an incentive to refinance their mortgages.

TransUnion also reported origination growth in the subprime risk tier grew at a significant rate across auto, personal loans and credit cards following declines in 2017. Subprime originations in the personal loan category grew by 28% between Q2 2017 and Q2 2018, compared to a yearly decline of 7.1% over the prior year. Auto showcased a similar trend, as independent lenders began issuing new loans to subprime consumers following industry pullback in 2016 and 2017. Subprime auto originations increased 7.3% year-over-year, after falling 7.8% year-over-year in Q2 2017.

“In 2016, the market experienced a pullback as lenders slowed or stalled subprime originations,” said Matt Komos, vice president of financial services and research and consulting at TransUnion. “The pendulum is starting to swing back, as we see lenders once again extend credit to subprime consumers. In this environment, lenders are continuing to focus on risk tolerance and are taking this into consideration as some of them are shortening loan terms, managing interest rates and lowering loan amounts or credit lines.”

The report said while total mortgage originations have continued to flatten, the subprime risk tier saw modest origination growth of 3.4% year-over-year, representing the largest volume of subprime loans originated in the second quarter post-recession.

“As lenders continue to adjust strategies and monitor for risk, delinquencies have flattened and remained low,” Komos said. “Conversely, origination growth is taking place most noticeably in subprime, but is also taking place across most risk tiers. Overall, these insights point to a healthy market and should these trends continue, we can expect lenders to continue extending credit.”

The report said personal loan balances reached a record-high $132.4 billion at the end of the third quarter, an increase of 18.0% from the previous. Personal loan originations grew at an annual rate of more than 20% for the third consecutive quarter, growing 23% year-over-year in the last quarter. Subprime originations expanded at the fastest rate, increasing more than 28% from the prior year. At the same time, the average new loan amount for subprime consumers continues to decrease, with more lenders offering smaller subprime installment loans as alternatives to payday loans. The 60+ day delinquency rate per borrower remains relatively low at 3.41%. Overall, this represents an increase of 28 bps over Q3 2017, 12 bps lower than Q3 2016 and 10 bps lower than Q3 2015.