03 March 2015

The Coming Bankruptcy Boomlet?

Notwithstanding the Great Recession and the painfully slow recovery, the number of bankruptcies--personal and business--are low and falling. Read about the numbers here.

One of the significant reasons personal bankruptcies are as low as they are is that lenders learned an important lesson in 2009: Don't lend to folks who can't pay back their loans. While this point may seem obvious, it is the case that lenders are chasing profits and lending a high rates to the euphemistically termed "sub-prime" borrowers generates more interest income--at least in the short term--than lending to folks who have multiple lending option.

Which is why this piece of news from the New York Times Dealbook is important: "Wells Fargo, one of the largest subprime car lenders, is pulling back from that roaring market, a move that is being felt throughout the broader auto industry."

Increasing consumer debt has been a leading indicator for personal bankruptcy for many decades. If Wells Fargo is pulling back, it suggests that consumer debt may be nearing a peak and thus that an increase in consumer bankruptcy filings is around the corner.

How far away is the corner? Given Wells Fargo’s conservative stance, I’d hazard a guess that we’ll see an uptick in consumer bankruptcies in the first quarter of 2016.

1 comment:

  1. A reasonable prediction. Curious if it is a temporary reassessment or a larger pull-back. http://obsbankwatch.blogspot.com/2014/07/five-takeaways-from-wells-fargos.html