Delinquency Picture Continues to Improve

The remarkable economic climate has certainly been evident in loan performance. With one notable exception, delinquency rates on most types of consumer loans have experienced sharp declines over the past 12-18 months. Here we review the evidence from a variety of sources.

The chart below displays three series tracked by the American Bankers Association based on its monthly survey of member banks. The three series are indirect auto loans, home equity lines, and an overall composite index of eight types of closed-end installment loans (direct and indirect auto, mobile home, recreational vehicle, boat, home-improvement, home equity and other personal loans). The data are expressed as a percent of accounts (not dollars) delinquent 30 days or more and are reported on a seasonally adjusted basis. The ABA’s composite series fell to 2.14% in the first quarter, 2000, 18 basis points lower than one year earlier. Indirect auto loans were down 18 basis points from the previous quarter. Delinquencies on open-end home equity lines of credit were up slightly (5 basis points) from the fourth quarter of 1999, although delinquencies on closed-end home equity loans were down 16 basis points. The ABA’s chief economist, James Chessen, attributed the uptick on open-end home equity lines to their tendency to have adjustable rates (which have been rising), in contrast to closed-end loans.

Mortgage loan delinquencies have also improved steadily over the past year. According to the Mortgage Bankers Association, the seasonally adjusted delinquency rate for mortgage loans on one-to-four unit residential properties was 3.93 percent in the fourth quarter of 1999, down 17 basis points from the previous quarter and 33 basis points from the previous year. The decline during the fourth quarter of 1999 was the largest since early 1995. Foreclosures approached the lowest level of the decade.

Trans Union’s TrenData database confirms a brighter delinquency picture through the first quarter, 2000. TrenData measures the percent of borrowers holding a particular type of loan who are 30 days or more past due. For revolving and closed-end non-mortgage credit, delinquency rates declined at all levels of severity. The chart below shows that the percent of revolving credit borrowers who were 30 days or more past due fell 98 basis points to 4.6% in the first quarter, 2000, as compared to one year earlier.

The 30+ day delinquency rate for closed-end installment borrowers fell 48 basis points to 6.2%. However, the 30+ day delinquency rate on mortgages rose by 23 basis points relative to the first quarter of 1999. The rise in mortgage delinquencies is likely a consequence of the strong growth in mortgage debt per borrower during 1998 and early 1999 as well as higher mortgage interest rates. If so, the more recent interest rate hikes this year (and potential for more hikes in the coming months) are likely to put additional upward pressure on mortgage delinquencies in the coming months, even under stable economic conditions. Of course, high loan-to-value mortgages have become increasingly common in recent years and create additional vulnerability for borrowers and those lenders who hold such loans. A weakening in either house prices or personal income growth would trigger an additional rise in mortgage delinquencies.

Despite the overall improvement in delinquencies on revolving loans, the story varies substantially by type of issuer. In the first quarter, 2000 bankcard borrowers bucked the general downward trend in delinquencies. The percent of bankcard borrowers who were 30+ days delinquent increased 24 basis points to 3.48% compared to one year earlier. The figure below illustrates the dramatically different story for revolving credit issued by retailers and finance companies, whose delinquencies declined by large percentages from the previous year.

In fact, delinquency rates on revolving loans for finance company borrowers are now lower than those of bankcard borrowers for the first time since 1992, the earliest datapoint in the TrenData series. Differences in delinquency rates among retail revolving borrowers and bankcard borrowers have narrowed considerably. The findings regarding convergence of revolving delinquency rates supports the view that competition in consumer credit markets has greatly reduced the traditional market segmentation of borrowers by risk and type of creditor. As we saw in last month’s issue, bankcards are no longer held exclusively by low-risk, high income borrowers.