Lenders originated more subprime loans in the past year

The number of subprime loans originated is increasing with gains across personal loans, credit cards, auto finance, and mortgages.

TransUnion’s Industry Insights Report shows that 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.

Meanwhile, Subprime originations for personal loans grew 28% between Q2 2017 and Q2 2018 (originations are viewed one quarter in arrears to account for reporting lag), compared to a yearly decline of 7.1% over the prior year.

There was a gain too for auto loans (7.3% year-over-year), as independent lenders began issuing new loans to subprime consumers following industry pullback in 2016 and 2017 (decline of 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.”

Third quarter originations
Total mortgage originations decreased by 0.4% year-over-year, continuing a trend over the past year.

Consumer-level delinquencies continue to show consistent improvement, dropping every quarter since Q4 2009 and reaching 1.7% in Q3 2018, compared to 1.9% at the same time last year.

Delinquencies in the near prime risk tier dropped by 15% year-over-year, and in the subprime risk tier they declined 9% year-over-year.

Of the largest MSAs, Seattle, New York, and Boston experienced the largest declines in delinquencies while Houston, Dallas, and St. Louis experienced the smallest declines in delinquencies.

“The decline in mortgage originations is likely the impact we’re seeing from a combination of rising interest rates, steep home price appreciation, and limited starter home supply,” Joe Mellman, senior vice president and mortgage business leader at TransUnion.

Mellman says the incentive for homeowners to refinance is lower as interest rates rise.

“On the purchase side, those rising interest rates coupled with rising home prices lead to a ‘double whammy’ for consumers interested in ‘moving up’ into a more expensive home, leading many to decide to stay in place. This in turn puts pressure on starter home supply. This trend will likely continue into the near future,” he added.