In preparation for my presentation (Upstate Creditors Association meeting in March 2023) I read and researched so many articles and statistics it made my head spin. If you have been reading, watching, or listening to bankers, analysts, and the Fed the predictions are conflicting. Yes, 60% of economists feel we are heading for a recession. Today's news indicates the Fed expects a mild recession later this year.
Fed Chairman, Jerome Powell indicated The Fed will continue raising interest rates at least “a couple more times" and that’s a quote.
Mortgage Delinquency Outlook
Nearly every expert in the industry has made the housing market prediction that foreclosures will increase. Foreclosure starts rose 17% in January 2023 continuing a monthly rise but are still well below pre-pandemic levels.
Home prices are expected to decrease by 10% and as much as 25% in certain markets making it likely that low-and moderate-income homeowners with devalued underwater homes and high debt-to-income ratios are more likely than in previous years to miss payments and default and are less likely to receive refinancing approval.
However, CoreLogic’s monthly loan performance report found that just 3% of all mortgages are in some state of delinquency. That’s down 4% year over year, and less than a .1% increase from November 2022. Early delinquencies were up slightly, but serious delinquencies were down by .7%. Here in New York delinquencies were down by .9%
The healthy job market is helping borrowers remain current on their payments. Despite the report there are still concerns. Per a report from Black Knight in early December 2022, 8% of all homeowners who took out mortgages in 2022 (approximately 250,000 or 1 out of 12 homes), can no longer claim that their homes are worth more than the cost of their mortgages. Another 10% (approximately 1 million buyers, nearly 40% with FHA/VA loans), can’t claim that they have at least 10% equity.
Changes with the economy and inflation make it harder for everyone to pay off their debts. The borrowers with high debt-to-income ratios have greater difficulty making timely payments or keeping up with payments at all. When the value of their homes plummet, they also have difficulty refinancing and obtaining the buffer needed to get them through lean times. As a result, they’re often the first borrowers to become delinquent.
With the increased interest rates, more homes lose value and borrowers with high debt to income ratios will not be able to make their mortgage payments. The higher interest rates also make the options for mortgage modifications unattractive.
Originations
An interesting note on the originations end - the idea of supporting financially inclusive lending through expanded mortgage credit reports is gaining traction as credit bureau Equifax has endorsed the idea which adds monthly telecommunications bills, cable/satellite TV subscriptions, and utility payments to present a better picture of the potential risk of the borrower.
According to Equifax, this could enable more than 191 million consumers (80 million of which have a current, traditional credit file) to qualify for housing from a lender as they would be evidence of regular payments. On the other hand, I personally have always thought that looking at those monthly payments in addition to rent /mortgage or other loan payment types gave a more accurate overview of the borrower’s financial circumstances.
Credit Cards
With the ever-increasing interest rates and high inflation combined with recession fears we have and will continue to see increases in the delinquency rates for credit cards. Trans Union predicts delinquency on credit card to rise by .5%.
According to the most recent delinquency data from the Fed, the 30-day delinquency rate (or the percentage of total outstanding credit card balances that are currently at least 30 days overdue) rose from 5.2% to 5.9% in the fourth quarter of 2022. That’s the fifth straight quarter of increases. However, delinquency rates are still near historic lows. Before falling below 2% in the first quarter of 2021, rates had never dropped below that number since tracking began in 1991. Credit Card balances are at a record high of $986 Billion, certainly a change from 2 years ago when consumers were reluctant to take on more debt due to uncertainty surrounding the pandemic.
Auto Loans
Auto Loans may be the bright spot here? That being said, auto loan delinquencies are expected to rise. With the increased costs of a vehicle and continuing rate increase the size of outstanding loans has ballooned. The increase in the cost of living has affected consumers’ ability to make regular timely payments. Serious delinquencies are expected to modestly decline though. Once again, as long as unemployment remains low it is expected that the forecast is accurate.
So maybe the old saying that people pay their auto loans because you can sleep in your car but can’t drive your house remains true.
CFPB & Auto Loans
The CFPB has a new interest in auto loans, which is important to point out. Due to the substantial price increase of new cars, loan amounts are larger with higher monthly payments. The CFPB sees this as having an impact on household financial stability.
Last week the CFPB issued orders to 9 large auto lenders to provide information about their auto portfolios. They are looking at Loan Performance Trends. There is a lack of reliable information on repossessions:
Including how many days past due a loan typically is before a vehicle is repossessed
How long the consumer has paid on the loan before a repossession
And post-repossession impacts to the borrower and lender
The bureau is also seeking to gain insight into the kinds of technology used during repossession, such as GPS tracking and starter-interrupt devices. These devices raise other privacy, security, and liability concerns, including questions regarding their effectiveness, and impact on repossession timing.
The CFPB has pointed to a need for more consistent and granular data on delinquency and default trends, specifically the correlation between delinquency and geography, credit score, and income. This may be coming your way as an auto lender. It is also worth noting that the Supreme Court has agreed to decide whether the CFPB is constitutional.
For additional information - https://files.consumerfinance.gov/f/documents/cfpb_auto-finance-loan-1022-sample-order_2023-02.pdf
Unemployment
Regarding unemployment, as new figures are released the outlook and predictions will adjust accordingly to give us a more complete picture. Private-sector data have begun to show early signs of demand for U.S. workers cooling. The number of job postings tracked by jobs sites such as ZipRecruiter and Indeed have recently declined more than the federal measure of job openings.
Written by Trish Harris
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