Auto, Card, Mortgage Re-Leveraging Is Raising Delinquency Concerns
Consumers are seeking and receiving more credit, the latest survey of U.S. and Canadianbank risk professionals conducted for FICO by the Professional Risk Managers’ International Association finds. But this may be both good and bad news.
“Re-leveraging shows no signs of slowing,” according to these experts who expect delinquencies on auto loans and credit cards could reach their highest levels since the fourth quarter of 2012. And according to mortgage vendor Ellie Mae, the same trend is true on the mortgage side, with an added worry that mortgage lenders are loosening credit standards.
And as previous research has already shown, significant increases in auto and credit card delinquencies tend to precede new mortgage delinquencies.
“Banks are walking a fine line – trying to grow their lending portfolios without taking excessive risks,” says Andrew Jennings, chief analytics officer at FICO and head of FICO Labs. “While the delinquency predictions in our survey aren’t alarming, lenders will be keeping a close eye on these trends.”
Up to 34% of the 289 bank risk managers surveyed expect delinquencies on auto loans to grow in the next six months, with another 28% expecting a jump in credit card delinquencies.
At the same time, 58% expect average balances on credit cards to increase over the next six months, while 44% expect an increase in the amount of credit extended to consumers.
A similar survey of European bank risk managers about priorities in 2014 shows their top priorities are the same as those of their North American peers: improving risk management systems, growing profitability from existing customers, and improving the customer experience.
“Banks are trying to balance risk and growth,” by focusing on their existing customers, including small businesses, agrees Mike Gordon, EVP for sales, services and marketing at FICO.
Other data confirm the trend.
An Ellie Mae Origination Insight Report based on a sample from approximately 3.5 million loan applications ran through Ellie Mae's Encompass mortgage management solution shows the overall closing rate was 54.3% in December, up from 53.1% in November 2013.
Purchases represented 54% of closed loans in December 2013, which was double the share of at the beginning of the year, said Jonathan Corr, president and chief operating officer of Ellie Mae. Meanwhile, refinancing increased only 1% over November to 46% in December, in part because the average 30-year note rate remained below 4.6%.
Credit criteria implemented by the banks, however, were not as conservative as expected.
More specifically, Corr added, by yearend 2013 lenders had closed mortgage loans “with the loosest credit requirements of the year.”
The average FICO score for all closed loans in November was 727, which is 11 points lower than the 2013 average FICO score of 738.
Year-over-year it is even worse at 21 points lower than December 2012, when the average was 748. In November the volume started to go up, with 31% of the mortgage loans originated closed having FICO scores below 700, compared to 21% in December 2012.
In addition, both back-end debt-to-income and loan-to-value ratios increased, according to Corr. On average, DTI was 39% and LTV at 82% for December, which were their highest points for 2013.
HARP-related refinancing activity also was on the rise for the second month in a row, Corr says, “with conventional refinances at 95%-plus LTV rose to 12.1% in December, the highest they’ve been since August 2013.”
All these data point to changes that indicate credit criteria is loosening and by default delinquency risk is increasing.