Finance Companies' Consumer and
Mortgage Credit

Focusing on short-term changes sometimes overlooks long-term trends. The latest G.20 release of the Federal Reserve Board reveals some significant trends in the investment by finance companies in consumer credit, real estate credit and business credit during the period from 1996 through August 2001. At the end of August 2001, finance companies held a total of $1,189.7 billion in consumer credit, mortgage loans on one-to-four-family homes, and business credit. (The data for August 2001 are seasonally adjusted.) After a brief review, we will focus on changes in their investments in consumer and home mortgage credit during those four and two-thirds years.

First, let us consider the change in the levels of outstandings on the three major categories of credit held by finance companies that occurred between the end of 1996 and the end of August 2001. The accompanying table shows that over the period of almost five years, finance companies invested about 55 percent of their funds in consumer and residential real estate credit, with the balance invested in loans to business.

Source: Federal Reserve Board, Release G20.

While finance companies have consistently invested about two-fifths of their funds in consumer credit, there were significant changes in their emphasis on the types of loans.

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Over the period the dollar amount of motor vehicle loans grew by 96 percent, while investment in motor vehicle leases rose by just five percent. Investment in revolving credit grew by almost 90 percent but almost all of the increase occurred in securitized leases, possibly as a result of acquisition of one or more large portfolios. There was a 16 percent decline in finance companies' investment in one- to four-family residences, as well as a 20 percent drop in investment in "other" loans.

There were significant differences in finance companies' reliance on securitization of their loans. Whereas 30 percent of motor vehicle loans were securitized in 1996, 47 percent were finance in this way in August 2001. In contrast, less than ten percent of motor vehicle leases were securitized in each year. About 43 percent of revolving credit was securitized in August 2001.