Credit Quality Still Good but
Warning Signs Appear

The effects of a healthy economy and tighter lending standards have produced dramatic improvements in portfolio performance across all types of consumer lending during the past 24 months. Credit card issuers have seen the greatest improvements, but all types of loans including closed-end installment and mortgage loans have exhibited declining loss rates. The good news still far outweighs the bad, but some early signs of a reversal are beginning to emerge.

The American Bankers Association reported that the number of credit card accounts past due at the end of the second quarter, 2000 fell to 2.99% of all accounts, down 34 basis points from second quarter, 1999 and the lowest level since the fourth quarter of 1994. This good news was confirmed by both the Fitch IBCA and Moody's Investors Services aggregate credit card indices based on securitized pools of credit card receivables. Moody's reported that the aggregate issuer delinquency rate (the proportion of aggregate account balances in which a monthly payment is 30 days or more past due, as a percentage of total card balances) declined in July, 2000 to 4.41%, down 25 basis points from one year earlier. This marked the 32nd consecutive month in which the delinquency index fell on a year-over-year basis and the 17th straight month in which it remained below 5.0%. Similar good news was evident in the Moody's charge-off rate which fell in July, 2000 to 5.16%, down 55 basis points from July, 1999 and the lowest level since March, 1996 (see nearby chart). In addition, the charge-off rate declined on a year-over-year basis for the 29th consecutive month. The Moody's aggregate delinquency and charge-off statistics derive from the $318 billion of securitized bankcard receivables rated by the company.

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Similarly, the Fitch Credit Card Performance Index for August, 2000 showed continued improvement as charge-offs fell to 4.93% as compared to 5.58% in August, 1999. Charge-offs in August were 200 basis points below their mid-1999 peak. The Fitch indices are compiled from the performance of the $310 billion of credit card receivables managed by the top general purpose, private label and retail credit card issuers.

Less welcome was the news that the Fitch delinquency index in August rose to 2.89% (tracking balances 60+ days past due), up for the second consecutive month, but still below its August, 1999 level. In his commentary, Mathew Murphy, Associate Director of the Fitch Credit Card ABS Group wrote that "while consumers' credit quality measures still remain sound, higher than expected delinquency and bankruptcy behavioral patterns point toward higher charge-offs in the coming months." Bankruptcies jumped unexpectedly in late summer, but through October they continued to track at a level that would result in a 4% decline for the year.

Another disquieting note appeared in the American Bankers Association's composite delinquency index of closed-end installment loans (which includes eight types of loans such as direct and indirect auto loans, personal loans, RV and mobile home loans, and closed end home equity loans) for the second quarter, 2000. The composite delinquency index (percent of accounts 30 days or more past due) rose to 2.3% from 2.09% one year earlier. ABA Chief Economist James Chessen said that while the closed-end delinquencies were not alarmingly high, "the fact that they went up in seven out of eight (loan) categories is something to pay attention to as a possible warning."

Second quarter, 2000 statistics from Trans Union's TrenData database echo this warning. TrenData measures the percent of borrowers (not accounts) holding a particular type of loan who are delinquent. Two charts nearby show that delinquent borrowers are beginning to trend upward. The percent of borrowers nationwide who experienced serious delinquency on mortgage loans (60+ days) rose during the second quarter, 2000 compared to the second quarter of 1999. Similarly, the percent of borrowers who experienced serious delinquency (90+ days) on closed-end auto loans and other types of non-mortgage installment loans rose as well, by about 9% compared to one year earlier.

Higher delinquencies were also evident among borrowers with revolving credit. The percent of bankcard borrowers with serious delinquencies (90+ days) rose on a year-over-year basis for the third consecutive quarter. About 1.3% of all bankcard borrowers were 90+ days delinquent on at least one of their accounts at the end of the second quarter, 2000.

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