Reaching GFC Levels of Delinquency

I might as well starting sharing my ChatGpt notes:

Note: BAA is very crowded trade. many of these masters of the universe types are playing it.

This is potentially very bad news for ABS valuations, particularly the lower-rated tranches. And it fits remarkably well into our developing Minsky thesis.

What strikes me about this chart isn’t simply that delinquencies are rising. It’s the magnitude and speed of the deterioration.
Measure 2022 2025 Change
Families with any late payment 12% 20% +67%
Families 60+ days late ~5% 8% +60%
2007 comparison, any late payment 21% 20% Nearly identical
The 60-day figure is particularly troubling. These are not necessarily households that simply forgot to mail a check.

The ABS transmission mechanism

There are several stages to watch:
1. Consumer deterioration: Credit cards, auto loans and unsecured personal loans begin experiencing elevated delinquencies.
2. Collateral deterioration: ABS pools experience rising charge-offs, reduced excess spread and potentially lower recoveries.
3. Tranche deterioration: First-loss equity and subordinated tranches absorb losses, potentially exhausting credit enhancement.
4. Valuation deterioration: Investors demand wider spreads, depressing market values even before realized losses reach senior tranches.
5. Financing deterioration: Leveraged holders face higher haircuts, margin pressure or difficulty refinancing.

That fifth stage is where our Minsky framework becomes especially interesting.

Why this matters for insurers
Our earlier research into insurers’ investment portfolios becomes more consequential. The question is no longer simply how much ABS an insurer owns. It’s what part of the capital structure it owns.

Consider two insurers each holding $500 million of consumer ABS.
One owns predominantly AAA senior securities with substantial subordination.
The other owns BBB and below-rated mezzanine securities, including potentially weaker vintages.
Those are dramatically different exposures, even though both companies might report $500 million in ABS holdings.
And if those holdings are carried using models rather than observable market transactions, reported book values may lag deterioration.

One important qualification

The Federal Reserve chart measures the percentage of families experiencing at least one late payment, not the percentage of loans delinquent or the dollar value of delinquent collateral. It also doesn’t distinguish credit cards from mortgages, auto loans or other borrowing.Therefore, we cannot directly translate 20% of families into a 20% ABS delinquency rate.

Nevertheless, the near-return to the 2007 household distress reading is a significant warning signal.
What I’d add to our Minsky screen

I’d now put three measures alongside our existing insurer and structured-credit research:
– Consumer ABS: Delinquencies, charge-offs, excess-spread erosion and vintage performance.
– Tranche exposure: Actual credit ratings, subordination, collateral composition and unrealized losses relative to tangible equity.
– Market pricing: BBB/BB ABS spread widening, forced selling and divergence between reported carrying values and executable market prices.

There is another subtlety: ABS can suffer substantial mark-to-market declines without corresponding ultimate principal losses. That distinction matters enormously for insurers with stable liabilities versus leveraged investment vehicles needing immediate liquidity.

My larger concern is that household credit deterioration, commercial real estate stress and private-credit problems could become correlated. Diversification that looks attractive in an insurer’s investment presentation may prove considerably less effective during a broad liquidity squeeze.

And remember, the chart’s latest observation is 2025. It establishes a troubling starting point, not necessarily the current October 2026 trajectory.

The next question I’d pursue is whether BBB consumer ABS spreads are already reflecting this deterioration or whether the structured-credit market is still pricing something close to normality.
If it’s the latter, we may have identified another important fault line in the Minsky sequence.

My comment: This forces BAA trances down in the pecking order as the lower tranches get seriously impaired. The absorbing cushion gets removed.

Exactly. The critical issue is the erosion of subordination protecting the Baa/BBB tranche. And that creates a nonlinear deterioration in credit quality.

The distinction is that the BBB tranche doesn’t formally move down the payment waterfall. Rather, the loss-absorbing protection beneath it gets consumed, leaving it increasingly exposed to the next dollar of losses.

Consider a simplified $100 million ABS structure:
Tranche Original After $9M losses
AAA senior $75M $75M
A/AA mezzanine $10M $10M
BBB/Baa $10M $6M
BB/equity $5M $0
Protection below BBB $5M $0

Assuming losses are allocated from the bottom upward, the BBB tranche has already suffered a 40% principal impairment. Every additional dollar of loss now hits it directly.
And there are three particularly dangerous consequences.

1. Ratings can deteriorate before principal losses arrive. Rating agencies reassess expected collateral losses against remaining credit enhancement. A BBB tranche can become speculative-grade well before it experiences actual principal impairment.
2. Valuations can fall faster than collateral performance. Investors demand greater compensation for the newly exposed BBB tranche. Spreads widen, liquidity disappears, and market prices decline.
3. Insurer capital becomes vulnerable. Downgrades can increase regulatory capital requirements, while recognized impairments reduce surplus. That is particularly troublesome for insurers whose portfolios already contain unrealized losses or opaque structured-credit exposures.

One qualification: ABS structures vary. Excess spread, reserve accounts, overcollateralization and sequential amortization can replenish or preserve protection. We need to examine those mechanisms rather than assume every subordinated tranche is being exhausted.

But your central observation is important.

The dangerous point in a credit cycle isn’t necessarily when the first losses appear. It’s when the remaining cushion becomes insufficient to protect the investment-grade tranches. That is where a seemingly manageable consumer-credit problem can suddenly become a capital problem for institutional holders.

And it sharpens our insurer short thesis: I would pay particular attention to Baa/BBB structured-credit exposure relative to tangible equity, especially where the underlying collateral is consumer-sensitive and disclosure of tranche attachment points is poor.