Despite Record Surge In Subprime Car Loan Originations, US Household Debt Dropped In Q2: First Since COVID

Something unprecedented happened in the second quarter: aggregate household debt balances declined by $13 billion, a 0.1% decline from Q1. Balances stood at $18.8 trillion, up $4.6 trillion since the end of 2019, just before the pandemic recession. But the reason why we say it was unprecedented, is that the Q2 drop was the first quarterly decline in total household debt since the second quarter of 2020, when the US economy was gripped by the covid lockdown shock leading to a historic deleveraging.

In fact, the only time aggregate household debt slides is during and right after periods of financial or social crisis. And yet, in Q2, risk assets soared.... which makes one wonder: just how bad is the economy really if one takes away the constant, debt-fueled (both on and off balance sheet) AI meltup?

Here is the breakdown by main category: 

• Mortgage debt at $13.12t after $13.19t in 1Q, a decrease of $74b
  • Mortgage delinquency rate fell to 0.99% from 1.09% prior quarter

According to the NY Fed, the decline was "due to a temporary gap in the reporting of mortgages on credit reports due to a transfer of servicing." Meanwhile, balances on home equity lines of credit (HELOC) rose by $13 billion, marking the 17th consecutive quarterly increase. Outstanding HELOC balances now total $459 billion, $142 billion above the low reached in 2022 Q1.

Non-housing debt balances, which apparently were not impacted by a tranfer transfer of servicing, grew by $48 billion, or 0.9%, from 2026Q1. Auto loan balances rose by $28 billion (1.7%), and credit card balances increased by $21 billion (1.7%). Student loan balances declined slightly (-0.4%). Other balances, which include retail cards and consumer finance loans, edged up by $6 billion to $568 billion. Key highlights:

• Student loan debt total at $1.651t from $1.658t in prior quarter, a decrease of $7b
  • Student loan delinquency rate rose to 10.6% from 10.34% prior quarter
     
• Credit card debt total at $1.263t from $1.242t in prior quarter, an increase of $21b
  • Credit card delinquency rate fell to 12.92% from 13.12% prior quarter

Some of the key charts from the latest report, staring with Mortgage Origination by credit score:

Auto loan origination by credit score. The notable thing here is the record surge in subprime originations (highest number of originations for sub 660 FICO applicants)...

... which was largely the result of a surge in 30-50 year olds getting a new auto loan.

In case going NINJA on auto loans wasn't enough, along with record credit card balances, we saw a much higher jump in credit card limits. Which means consumers have a LOT of dry powder.

Subprime-riddled auto loans aside, the one chart that may be most notable is the one showing that transition into delinquency b y loan type continues to rise, especially for Auto Loans, Mortgage and Credit Card. Of course, since student loans are already deep in the delinquency pipeline (most are 90+ days) there is simply nobody left to start the default process: most already have.

Commenting on the latest report, Joelle Scally, Economic Policy Advisor at the New York Fe said that "delinquency rates across most products have held steady over the past two years," adding that "new delinquencies for auto loans and credit cards remain at elevated levels, a trend we’ll continue to monitor."

And, ominously, as new delinquencies rise, the number of 90+ days delinquent loans are already near record highs for both credit cards, auto loans and student loans.

More in the full Household Credit presentation.