October 5, 2014

Boom times for the repo man

The good news for the economy is that consumers are buying more. The bad news is that they're not paying for what they buy. Debt delinquencies are surging, and so are collection agencies.

The Urban Institute found that more than a third of Americans are so badly in hock that debt collectors are chasing them. Debt collectors are, of course, a last resort. Companies use them when all else fails and the debt is more than 180 days past due. When a consumer goes six months without paying a bill, the person surely has no intention of paying or is unable to pay.

That's why debt collection is a growth industry. When a creditor is stiffed these days, it goes after deadbeats with gusto. As Bud, a character Harry Dean Stanton played in the 1984 classic film Repo Man, described the state of play, "Credit is a sacred trust. It's what our free society is founded on. Do you think they give a damn about their bills in Russia?"

The extent of the bad debt is stunning. About 77 million Americans – 35% of adults with a credit file – have debt in collection. They owe an average of $5,178, which doesn't sound like much. But keep in mind this is debt that's gone into collection, not total household debt. The figure does not include mortgage loans, but does include credit card, medical and utility debt.

The average American household has $15,480 in credit card debt alone and consumer debt totals $11.74 trillion. Add in federal, corporate, state government, municipal and other countries' debt, and it's a wonder that anyone anywhere is still solvent.

You may recall the cheering that took place in 2009, when consumer debt levels decreased. But as the chart shows, that was a small dip on a steep and steadily rising mountain of IOUs.

The increase in debt collection shouldn't be surprising, given that more than 100 million Americans are not working and that median household income has

dropped nearly 10% since the financial crisis began. This is one of the nasty side effects of the dismal gross domestic product growth the U.S. has experienced for more than five years.

Consumer spending produces economic growth. If consumers have no money to spend and have tapped out their credit cards to the point where collection agencies are after them, it's not a good sign of things to come.

Another not-so-good sign is that the rate of car repossessions jumped 70.2% in the second quarter, with much of that increase coming from finance companies not run by automakers, banks or credit unions.

As NBC put it, "The repo man is getting very busy as a growing number of car and truck owners are struggling to make their monthly auto loan payments."

And Zerohedge noted, "we have been closely following the ongoing deterioration of the car subprime loan bubble: something that both Bloomberg and the Fed have also been paying close attention to recently, yet a bubble which nobody wants to burst, because, as we wrote several days ago, it is none other than the subprime car loan bubble that allowed car production to surge the most last month since Obama's Cash for Clunkers capital misallocation program, in the process lifting overall manufacturing and industrial production, and thus GDP."

In fact, auto loans hit an all-time high of $839 billion, climbing 11.7% in the second quarter, according to Experian, which furnishes credit ratings.

Not to worry, though. As Melinda Zabritski, senior director of automotive finance for Experian, noted, borrowers with subprime and deep subprime credit scores are primarily the ones who are driving the surge in delinquencies and repossessions.

In other words, a major American industry is selling its products to people who can't afford them and are unlikely to pay for them.

Anyone who wonders where that will lead has a very short memory.