TransUnion released its annual forecasts today on two primary consumer credit variables - credit card and mortgage delinquency rates.
Credit card delinquency rates (the ratio of bankcard borrowers 90 days or more delinquent on one or more of their credit cards) are expected to rise nearly 10% from 1.51% in Q4 2013 to 1.66% in Q4 2014.
Even with that increase, the card delinquency rate would remain far below average historical levels. Between 2007 and 2012, the credit card delinquency rate has averaged 2.38% during the fourth quarter.
The credit card delinquency rate should remain relatively low next year, said Steve Chaouki, a co-author of several credit lending studies and group vice president in TransUnions financial services business unit. Delinquency has remained near all-time lows post-recession as lending to the subprime population was muted.
Recent TransUnion data show that the subprime pool has declined both in absolute volume and as a percent of the overall credit card market since its peak before the recession. In Q2 2007, subprime borrowers opened 5.1 million new credit card accounts, comprising nearly 29% of all credit card originations.
That dropped to a second quarter low in 2010, when subprime consumers opened just 871,000 credit card accounts and comprised under 12% of card originations in the quarter. In Q2 2013, subprime borrowers opened 1.5 million credit card accounts, slightly less than 14% of all new credit card accounts. Along those lines, as of Q3 2013 subprime borrowers comprised 8% of all credit card accounts. By contrast, in Q3 2007 subprime borrowers made up 13% of the total credit card population.
This is a significant point because subprime borrowers traditionally have much greater delinquency rates than the rest of the population, said Chaouki. In the third quarter of 2013, the subprime borrower credit card delinquency rate was 13.35% while the total delinquency rate for the nation was only 1.36%. If there are fewer credit cards in the subprime borrower segment, the overall credit card delinquency rate will remain low.
Interestingly, over the past three years we have seen material increases in non-prime credit card origination volumes from the nadir in 2010, yet delinquencies overall have remained low. The consumer-level card delinquency rate in Q3 2010 was 2.1%, significantly higher than the 1.36% rate in Q3 2013. It would be reasonable to expect lenders to issue more non-prime credit cards in light of these low delinquency levels. In part, this should eventually cause delinquencies to increase, though we expect them to remain well below historic norms.
On a state level, the credit card delinquency rate is expected to increase most during 2014 in Michigan (up 26.2%), Oklahoma (up 19.2%) and Mississippi (up 16.6%). States expected to see the largest declines in 2014 are Oregon (down 10.6%), North Dakota (down 6.9%) and Idaho (down 5.9%).
As credit card delinquencies remain low, credit card debt per borrower is expected to rise throughout 2014 to $5,371. This would mark a 2.7% increase between the end of 2013 and 2014. However, credit card debt remains low compared to recent years. Between 2007 and 2012, the average fourth quarter credit card debt was $5,788.
Consumers have been deleveraging for quite some time, deciding not to use their credit cards as much as they have in the past, said Chaouki. There are some indications that borrowers are adding to their credit card debt more recently, but this is occurring at manageable levels. With low delinquency rates, greater access to card credit and generally well-managed balances, we consider the credit card market to be healthy and functioning well, and should continue that way through 2014.
TransUnions forecasts are based on various economic assumptions, such as gross state product, consumer sentiment, unemployment rates and real estate values. The forecasts would change if there were unanticipated shocks to the global economy affecting recovery in the housing market, or if home prices unexpectedly fall.
The national mortgage loan delinquency rate (the ratio of borrowers 60 or more days past due) is projected to decline to 3.75% by the end of 2014 from an estimated 3.94% at the conclusion of 2013. While the mortgage delinquency rate, a statistic generally considered to be a precursor to foreclosure, is expected to decline for the fifth consecutive year, the forecasted drop will be the lowest observed in that timeframe.
The 4.82% expected decline in 2014 would reverse the trend of increasing percentage declines. Since 2010, the rate of decline in delinquencies had accelerated each year from 6.40% in 2010 to 7.14% in 2011 to 15.05% in 2012 and a projected decline of 23.43% in 2013. To put those numbers in perspective, the mortgage delinquency rate rose almost 50% in both 2008 and 2009, during the height of the mortgage crisis.
TransUnion expects the national mortgage delinquency rate to continue its downward trend, though we see a few obstacles in 2014 that will limit the decline and keep it well above normal levels, said Tim Martin, group vice president of U.S. housing in TransUnions financial services business unit. The primary reason for the slowdown will be the pending rise in interest rates, which may hinder home sales while also blocking refinancing as an exit strategy for some mortgage borrowers. Additionally, foreclosure timelines continue to expand in many states, keeping longer vintage delinquencies in the system.
The mortgage loan delinquency rate peaked in most states in late 2009 and early 2010, with national levels of 6.88% (Q4 2009) and 6.93% (Q1 2010). Since that time, it has dropped nearly every quarter with exceptions in Q3 and Q4 2011.
While mortgage delinquencies have dropped nearly 41% from that peak period to 4.09% in Q3 2013 (latest data available), subprime borrower delinquency levels have only dropped about 15% from 42.96% in Q1 2010 to 36.56% in Q3 2013. Subprime borrowers are identified as those consumers with a VantageScore credit score lower than 640 on a scale of 501-990. Both delinquency levels exceed those observed in Q2 2007 (earliest data available for this analysis) when the national mortgage loan delinquency rate was 2.23% and the subprime delinquency rate stood at 20.52%.
The encouraging story surrounding subprime delinquency rates is that most of the decline observed has occurred since the beginning of 2012. As interest rates stayed low, house prices started to reboundand that gave many subprime borrowers the option of refinancing or selling their way out of the delinquent mortgage before the logjammed foreclosure process caught up to them, said Martin.
TransUnion is projecting the largest mortgage delinquency rate declines to happen in Nevada (down 25.17%), Florida (down 15.31%), Georgia (down 11.74%), Michigan (down 10.18%) and New Jersey (down 10.17%). The biggest percentage increases are expected in North Dakota (up 47.72%), Montana (up 12.05%), Alaska (up 11.70%), Hawaii (up 7.35%) and Texas (up 7.33%).
TransUnions forecast also highlights the differences in improvement of the four states most impacted by the housing crisis: Arizona, California, Florida and Nevada.
We are encouraged to see states hurt most by the mortgage crisis continue to lead the way in improvement, though there appears to be a shift with Nevada and Florida replacing California and Arizona as the states expected to see the biggest improvements in 2014, said Martin. These four states played a major role in elevating the U.S. mortgage delinquency rate by more than 200% between 2007 and the start of 2010. While Arizona and California now have mortgage delinquency rates well below the national average, Florida and Nevada remain at elevated levels but, as such, should show above average improvement next year.
The data provided are gathered from TransUnion's proprietary Industry Insights Report, a quarterly overview summarizing data, trends and perspectives on the U.S. consumer lending industry. The report is based on anonymized credit data from virtually every credit-active consumer in the U.S.