By Josh Zumbrun

Subprime auto loans are back and already going sour.

The number of subprime auto loans slipping into delinquency climbed to the highest level since 2010 in the third quarter, and is following a pattern much like the months heading into the 2007-09 recession, according to fresh data from the Federal Reserve Bank of New York.

Overall "auto loan delinquency rates were low and relatively flat," said Andrew Haughwout, senior vice president at the New York Fed. But he noted there are "significantly higher and rising delinquency rates among subprime auto loans."

In the aftermath of the financial crisis, which was brought about by the collapse of the subprime housing market, lenders largely refrained from making auto loans to borrowers with similarly low credit scores.

Subprime mortgage lending remains at very low levels. But as the financial system has recovered, subprime auto loans have returned in force.

New auto loans to borrowers with credit scores below 660 have nearly tripled since the end of 2009. So far in 2016, about $50 billion of new auto loans per quarter have gone to those borrowers. About $30 billion each quarter has gone to borrowers with scores below 620, which are considered bad.

The new data were released as part of the New York Fed's quarterly Report on Household Debt and Credit, which is based off anonymized Equifax credit report data. The report showed total household debt grew to $12.35 trillion in the third quarter, an increase of $63 billion from the second quarter.

The increase was driven by a $32 billion rise in auto loans, as well as smaller increases in student loans and credit card balances.

The report showed a continuation of recent trends, with balances rising quickly for non-housing debt, but little or no growth in mortgage balances.

Delinquency rates declined in the quarter for mortgages, student loans and credit cards. The number of individuals with a new foreclosure notation on their credit reports hit the lowest level in 18 years of data. But delinquencies on auto loans are rising, driven by the increase in the subprime sector.

The increasing delinquency of subprime auto loans is worrisome because it has come when the overall U.S. economy has gradually been on the mend and the unemployment rate has been falling. The credit quality of other types of loans has improved.

The rise in auto lending, particularly the subprime sector, has raised alarms among some regulators in Washington,such as Comptroller of the Currency Thomas Curry and Richard Cordray, head of the Consumer Financial Protection Bureau.

The rate at which auto loans for borrowers with credit scores below 620 have slipped into 90-day delinquency has climbed for 10 consecutive quarters.

Lenders, of course, know that subprime borrowers are more likely to become delinquent and charge higher interest rates on those loans. The mistake during the financial crisis was that while lenders expected higher defaults among subprime loans, they failed to anticipate just how high it would rise.

Subprime auto loans have many differences with the subprime housing loans that helped fuel the financial crisis. Cars can be quickly repossessed while home foreclosures can linger for years. Foreclosures can drag down the value of neighboring homes, a type of contagion, whereas the value of one's car doesn't change if a neighbor's car is repossessed. And few people buycars on credit, hoping to quickly turn around and flip them for a profit.

Write to Josh Zumbrun at Josh.Zumbrun@wsj.com

(END) Dow Jones Newswires

November 30, 2016 12:04 ET (17:04 GMT)

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