Sound underwriting standards, coupled with family-income and home-price growth, have helped reduce mortgage delinquency rates. The serious-delinquency rate for home mortgages as of March 2019 was the lowest in more than 12 ½ years, and the foreclosure rate was the lowest in more than 20 years, according to CoreLogic’s TrueStandings data.
One might expect that other forms of consumer lending also would have lower default rates today. But the 90-day delinquency rate on consumer credit has moved higher in the past two years and was more than 2% higher than it was in mid-2006, according to a report from the Federal Reserve Bank of New York.
The Fed report noted that the 90-day delinquency rate for four types of consumer credit (auto loans, student loans, credit cards and other debt) was 8% during first-quarter 2019, up from a post-recession low of 7.4% in third-quarter 2016. The delinquency rate for these types of debts was even lower in pre-recession days, reaching 5.9% in third-quarter 2006.
One factor in today’s higher consumer- credit delinquency rates has been the growth of student loans, which tend to have high rates of late payments. Student-loan debt, as measured by dollar volume, has grown more than sixfold since 2003, reaching $1.5 trillion at the end of this past March. Its share of all consumer credit tripled from 12% to 37% during that time frame. Auto loans are the next largest slice of consumer credit, with $1.3 trillion in outstanding debt. Combined, auto loans and student loans represented about two-thirds of all consumer credit as of March 2019.
Borrowers ages 18 to 39 held 57% of student debt and one-third of auto debt during first-quarter 2019. They represent a key demographic for the housing market as the youngest members of this age group (who are part of Generation Z) are starting to rent, while those in their late 20s and early 30s are often first-time homebuyers. Those in their late 30s may be potential trade-up buyers. Large amounts of consumer debt, however, increase the debt-to-income ratios for prospective mortgage applicants. Consequently, delinquent consumer debt will lower these people’s credit scores and impede their ability to qualify for a home loan.
Student loans have had 90-day delinquency rates above 10% since 2013, which are much higher rates than prior to the Great Recession. Late-payment rates for auto loans have been trending upward as well and remain much higher than their 2006 levels. In contrast, credit-card delinquency rates are less than where they were in the early 2000s (although they also have been trending higher over the past three years), while delinquencies for home mortgages and home equity lines of credit continue to move lower.
One reason for the deterioration of auto-loan performance relative to mortgage performance is the extensive amount of subprime financing occurring with auto loans. As of 2018, 20% of these borrowers had a credit score below 620 and nearly one-third had a score below 660.
According to the TrueStandings data, only 1% of home mortgage borrowers had credit scores below 620 and only 8% were below 660 as of last year. It stands to reason that high delinquency rates on other types of consumer credit could slow consumption spending and affect the home-purchase market in the coming year. Consequently, this could pose risk to overall economic growth, the financial health of households and the portfolios of mortgage lenders.
