Delinquencies on Home Equity Loans, Credit Cards Head in Opposite Directions

In a reversal of recent trends, U.S. consumers are more likely to make timely payments on their home equity loans, but they have become less diligent about staying current on their monthly credit card bills.

Delinquent payments on home equity loans, which skyrocketed during the recession, are now at their lowest level since late 2008, according to a new report from the American Bankers Association. Meanwhile, delinquencies on bank-issued credit cards, which bottomed out early last year, have climbed to their highest level in five quarters.

ABA chief economist James Chessen says the diverging trend lines reflect the fact that the fact that the credit card industry has progressed further from the depths of the recession than the mortgage industry has. Barring unforeseen events, he expects the recent trends to continue.

"The home equity delinquencies are still higher than they really should be in a normal economic environment, and there's plenty of room for those delinquencies to come down," Chessen says.

Chessen adds that credit card delinquencies have been "so low, it's hard to imagine them going much lower."

Credit card delinquencies reached a cyclical low of 2.41% in the first quarter of last year, according to the ABA. By the fourth quarter, they were up to 2.60%, which is still well below their levels in late 2011. (The ABA defines delinquencies as payments that are 30 days or more overdue.)

Meanwhile, delinquencies on home equity loans fell to 3.48% in the fourth quarter of 2013. That's down from a cyclical peak of 4.20% in the third quarter of the previous year. The last three months of 2008, which were the peak of the financial crisis, was the last time home equity loan delinquencies were below 3.5%.

A new survey of bank risk professionals by Fair Isaac Co. lends credence to the notion that delinquencies on home equity loans and credit cards are now on opposite trajectories.

The FICO survey found that 44% of respondents expect credit card delinquencies to rise over the next six months. Fewer than 30% of respondents had an expectation of rising delinquencies for home equity lines of credit.

The widespread prediction that credit card delinquencies will continue to rise is not cause for alarm, says Andrew Jennings, chief analytics officer at FICO.

"In some ways it's actually good news," he says. "What's happening, I think, is that we are seeing some growth in lending. Inevitably some of that growth is coming from lower credit-quality populations."

The ABA's quarterly report looks at delinquencies on a wide range of consumer loan products, and its overall trend in the fourth quarter was positive.

A composite ratio that tracks delinquencies in eight closed-end loan categories, including home equity loans and auto loans, fell to a record low of 1.59%.

"It's hard not to be positive when you see delinquencies declining in most categories," says Chessen.

Still, he's concerned that many U.S. consumers are unprepared for an unexpected financial shock. "One of the constant worries that I have is that there are still a lot of people who do not have any savings or financial buffer," Chessen says. "The worry is what happens if there is a disruption in income."