Exposing Who's Behind Surging Subprime Delinquencies (Hint: Rhymes With 'Perennials')
For months now we’ve been writing about the mysteriously rising subprime delinquencies afflicting auto ABS structures despite repeated confirmations from the Fed and equity markets that ‘everything is awesome’ (see “Auto Bubble Burst Begins As Subprime Delinquencies Soar To 2009 Levels” and “Signs Of An Auto Bubble: Soaring Delinquencies In These 266 Subprime ABS Deals Can’t Be Good” for a couple of recent examples). Shockingly, as confirmed by the chart below from UBS strategist Matthew Mish, 2016 vintage subprime auto ABS structures are even underperforming 2007/2008 vintage securitizations.
Now, Mish is back with more survey data explaining the who/what/when/where/why’s of spiking loan delinquencies.
Ironically, survey results suggest that households making over $100,000 per year are 2.5x more likely to default on loan payments over the next 12 months than those making under $40,000…because making more money just means you can afford more debt, right?
First, the survey evidence suggests the rise in consumer default perceptions has occurred primarily in the middle and upper household incomes cohort. And those consumers concerned with missing a payment are highest in the upper income category (household incomes of $100k+). In particular, the most elevated readings occur at the lower ends of the middle and higher income categories (i.e., 50-74k and 100-149k, respectively.
Of course, the most ‘shocking’ results of the survey suggest that our precious snowflake millennials are over 5x more likely to default than folks aged 45 and above. That said, we suspect that many of those defaults may come from student loan debt...which is totally bogus because higher education should be ‘totes free’, right?
In another shocking discovery, people with the most debt were also found to be most at risk of default…who knew?
Oddly, however, households who reported being able to cover their monthly expenses were more at risk of default than households burning through cash each month…sounds like these folks have picked up some valuable lessons from Tesla on how to burn through cash without defaulting…
Finally, this last chart was intended to shed light on why certain households are more likely to default but, in the end, the “no specific reason” category dominated responses leading UBS to conclude that people are just far more comfortable defaulting on debt, in general, in the post-crisis era.
This mosaic seems quite consistent with the reported concerns earlier around limited positive cash flow (income vs expenses) and the broader reality that real median wage growth has been largely non-existent in recent years (and for several decades) despite rising debt levels. However, the most commonly cited reason continues to be ‘no specific reason’. While difficult to prove decisively other survey results on the millennial generation specifically seem to be consistent with the thesis that US consumer willingness to default (or the lack of stigma associated with bankruptcy) may have increased further in the post-crisis era.
To summarize the UBS survey results, increasing delinquencies are being driven by millennials who graduated college with massive student debt balances, but were making decent money so they levered up even more to buy a house (or 2), a couple of cars and a timeshare. That said, now that the earnings growth they expected has failed to materialize, their sense of entitlement has taken over and they’ve decided to socialize their debt burdens while completely ignoring the stigmas associated with such actions.