The widespread use of credit forbearance programs has masked credit quality, but some analysts are seeing worrying signs of new defaults.
As the number of deferred loans declines, unemployment claims and unemployment have remained at record highs. Another factor making the trends difficult to read was the help millions of Americans received from the $ 600 a week federal unemployment benefit that expired in late July.
A report released Thursday by TransUnion found that the rate of serious late payment interest rates continued to decline in August, while 30-day late payment rates for the two largest payments in consumers’ wallets – auto and mortgage – began to rise slightly.
New payment defaults are closely monitored as an early indicator of deteriorating credit quality, which could lead to defaults and write-offs. Experian, another credit reporting company, pointed to similar trends in a September 15 report, and the Mortgage Bankers Association published a study on Sept. 17 that found 11% of renters and 8% of homeowners missed, delayed, or missed at least one payment have postponed April to June.
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Matt Komos, vice president of research and advice at TransUnion, said those who are dropping out of forbearance programs tend to have them now as a precaution to protect their money during uncertain times.
“Consumers who are still in need are more likely to experience a loss of income and therefore have more difficulty exiting these programs,” Komos said.
TransUnion’s latest Financial Hardship Survey the week of August 24th found that COVID-19 continues to affect consumers financially. While the percentage of financially affected Americans has fallen to 52% – the lowest level since the current survey began in March – concerned consumers remain concerned about their ability to pay for bills and loans (75%).
According to the survey, about a third of affected consumers are turning to savings to pay bills or loans, and 13% said they plan to open new credit cards.
Komos said it was difficult to say whether the spike in new bad debts was due to financial stress in these households or to “sloppy” bill payment routines after the indulgence break.
“Many consumers continued to make payments after signing up for financial housing plans,” Komos said. “The real litmus test of consumer credit health will emerge in the months ahead as these protections expire and consumers have less payment flexibility.”
Among credit unions, the 60-day default rate for all loans was 0.58% in July, up from 0.65% in July 2019, “due to loan deferral programs,” according to the CUNA Mutual Credit Union Trends Report released on Friday.
“We assume that the loan default rate will increase in the fourth quarter and then the depreciation rate in the first quarter of 2021,” said CUNA chief economist Steven Rick.
The latest MBA poll showed that 6.93% of the country’s 3.5 million homeowners were lenient on September 13, up from 6.93% a week earlier. The percentage of Fannie Mae and Freddie Mac deferred mortgages fell to 4.55% for the 15th week in a row – a 10 basis point improvement for Government-Sponsored Enterprises (GSE).
“The proportion of forbearance loans has fallen to its lowest level in five months, driven by a steady decline in GSE’s stake in forbearance,” said MBA chief economist Mike Fratantoni.
“However, not only has the share of Ginnie Mae loans in the deferral increased, but also the number of new deferral requests for these loans increased for two weeks in a row,” said Fratantoni. “While real estate market data continues to show a fairly strong recovery, the labor market recovery appears to have slowed and we are seeing the impact of that slowdown on FHA and VA borrowers in the Ginnie Mae portfolio.”
The Sep 15 Experian report showed that mortgage, auto, and unsecured personal loan defaults rose slightly from July to August in the 30 to 59 day range. Late payment defaults showed declines in both July and a year ago.
Melinda Zabritski, an automotive analyst at Experian, an Irish company that provides credit reporting and marketing services, said earlier this month that default numbers mean little now, making it difficult to predict charges. However, she said she expected lenders to repossess more cars by the end of the year as pandemic-related shelters expire.