Declines In Customer Default Rates Encouraging, Recovery Still Slow
It is not all bad news...Findings from Standard & Poor’s and Experian show customer credit defaults are steadily declining for mortgages and all other credit lines giving hope for an uptake in consumer spending that will help the overall economic recovery.
In October the first mortgage S&P Experian Consumer Credit Default Index declined to 2.91, a decrease of 3.36% from the previous month and 38.15% from the October 2009 level.
Second mortgages posted the largest monthly decline in defaults dropping by 16.28% compared to September 2010 and 48.12% on an annual basis to 1.79.
The decline was recorded across the board as the composite index reached 3.03, down 3.6% monthly and 36.26% on an annual basis.
Managing director and chairman of the index committee, David Blitzer described the findings as an indication of “more normal levels.” Nonetheless, he said, when viewed in conjunction with other findings from the Federal Reserve it becomes clearer that “customers are still reining in their borrowing” and the recovery will be slow.
Improvements were also seen across the major metropolitan cities and regions including New York, Los Angeles, Miami, Dallas and Chicago.
Findings from other industry data sources such as TransUnion have also shown that states with relatively stable home prices and less severe unemployment had lower mortgage delinquency rates.
TransUnion analysts noted that over the past three years unemployment and home value depreciation were the two primary drivers of mortgage delinquency, impacting both the ability and willingness of consumers to pay their monthly mortgage debt service. As a result, in areas where these effects were more severe, the country saw a more rapid progression through the levels of delinquency and into foreclosure.
Customer behavior that often is driven by expectations about the economy and their trust in the country’s financial institutions is a key factor to the recovery.
Various market insiders including Paola Sapienza, a professor of finance at the Kellogg School of Management, have stressed that a primary consequence of the 2008 financial crisis “was a large drop in trust Americans had in financial institutions.”
A recent study from the Chicago Booth/Kellogg School Financnial Trust Index found that the Dodd Frank bill “failed to meet” the most pressing consumer expectation “to overhaul the nation’s financial system.”
In September the level of trust dropped to 25% from 26% in July when the index reached its all time high. Two thirds of the respondents believe it is insufficient to protect the country from future bailouts that ultimately increase the national debt and prolong the crisis.
Customers’ sentiment about real estate pricing and strategic defaults shows that “positive housing trends dating from December 2008 have come to a screeching halt” as public expectations for the next 12 months worsened with the number of respondents expecting further depreciation rising from 20% to 30%.
Anger and resentment “are powerful emotions that are drastically affecting” not only predictions for real estate pricing, but also the likelihood that homeowners strategically default, warned Luigi Zingales who co-authored the Kellogg report.