Late payments on credit cards and auto loans are starting to pile up after a lengthy period when government stimulus payments helped keep the credit environment unusually benign. 

The recent increase in delinquencies is most evident among subprime and low-income borrowers, whose late payments appear to be approaching pre-pandemic levels, according to a new report from the Federal Reserve Bank of New York.

The New York Fed researchers stressed that the uptick is starting from “extremely low” delinquency levels, which were aided by pandemic-era fiscal relief and forbearance programs that helped consumers stay current on their payments.

But the rising delinquencies are worth monitoring, the researchers told reporters. They pointed to evidence of greater stress among consumers as inflation has hit a decades-long high.

The share of credit card debt in low-income ZIP codes that transitioned into delinquency status jumped to 2.38% in the second quarter, up from 1.92% a year earlier, according to the New York Fed’s quarterly report on household debt.

The latest figure remains below pre-pandemic levels of around 2.67%, but the jump among lower-income borrowers contrasted with mostly flat delinquency transition rates in higher-income ZIP codes, the report found.

The picture was similar in auto lending, where delinquency transition rates in lower-income ZIP codes jumped to 1.89% during the second quarter from 1.71% a year earlier. Borrowers in higher-income postal codes experienced a more mild deterioration, with delinquency transition rates creeping up from 0.7% to 0.73%.

Still, the New York Fed researchers noted the U.S. has “seen periods where delinquencies rise” despite a strong economy. They pointed, for example, to the increase in auto loan delinquencies that came in the months before the pandemic.

The report’s findings line up with recent commentary from bank executives, who have said that lower-income borrowers are seeing more signs of stress as their smaller savings buffers continue dwindling.

“If you really want to turn up the magnification on the microscope,” JPMorgan Chase Chief Financial Officer Jeremy Barnum said during a July 14 call with analysts, “if you look at cash buffers in the lower-income segments and early delinquency roll rates in those segments, you can maybe see a little bit of an early-warning signal.”

The big question is whether the delinquency upticks are “simply normalization” to pre-pandemic levels or the start of a more severe deterioration, Barnum said. JPMorgan is “not very exposed” to that segment of the population, he added.

If the strong U.S. job market stays on track, it “will guard against a large deterioration in debt performance,” analysts at Moody’s Investors Service wrote in a July 15 research note. But they also noted that the risks of a recession are rising and said that inflation is “eroding household resources and hitting certain demographics particularly hard.”

“The performance of some securitized U.S. consumer debt has already been weakening, with the benefits of pandemic-driven support for households fading amid high inflation,” the Moody’s analysts wrote in their note, which focused on securities backed by U.S. consumer and residential loans.

Overall, U.S. household debt rose by $312 billion to $16.15 trillion during the second quarter, driven primarily by larger mortgage and credit card balances. Card balances rose by $46 billion, notching a 13% increase from the same period last year and marking the largest jump in 20 years. Auto loans rose by $33 billion.

Mortgage balances increased by $207 billion in the quarter, helped by continued purchases of new homes even as a refinancing slump led to a slight slowdown in total mortgage originations.

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