Credit Risk Managers Predict Higher Mortgage Delinquencies

Credit risk managers expect consumers will have trouble making payments on a variety of loan types, according to the European Credit Risk Survey taken by FICO and Efma.

In spring 2011, credit risk management professionals were optimistic for improved consumer credit by the end of this year. However, weak economies and high unemployment have altered these individuals' expectations for the next six months.

More than 70 representatives from 26 European countries and 61 companies participated in this survey and predicted higher delinquencies across mortgages, auto loans and other credit products.

According to the survey, four times as many credit risk managers expect delinquencies for small business loans, current bank accounts and credit cards to worsen than experience improvements over the next six months.

For mortgages and auto loans, three times the number of respondents predicted deterioration in delinquencies rather than progress.

Only 12% to 14% of the responses indicated expectations for decreasing delinquencies on the consumer products included in this survey.

“These results are fully in line with the economic drama playing out across Europe,” said Mike Gordon, vice president and general manager for FICO in Europe, the Middle East and Africa. “Mounting economic problems and uncertainty about the adequacy of public and private sector responses are contributing to a darkening picture of credit performance over the next few months. We think lenders that focus on strengthening relationships with good customers will fare best here.”

Approximately three-fourths of the survey respondents said consumers are likely to be more loyal to the bank at which their account resides, while 46% of the credit risk managers indicated that consumers are now more likely to mistrust the bank.

Across Europe, 84% of credit risk managers expect consumers to be more focused on saving, while 71% believe they will be hesitant to use consumer credit.

“A much stronger focus on service may be the best approach for restoring bank trust and building loyalty,” Gordon said. “Clearly, with reduced demand for credit, banks will need to understand each consumer much better in order to make attractive offers. And expanding relationships with existing customers may be the best path for revenue growth, especially for the bank that holds the current account relationship.”

Survey participants are also divided about a consumer's concerns about their credit delinquencies. About 45% believe some or most consumers are less alarmed regarding their overall delinquency, contrary to the rest of the respondents who think the opposite.

Meanwhile, 39% of credit risk managers who were surveyed think consumers are likely to pay credit card obligations ahead of their other responsibilities, while 13% believe the opposite and 48% said this is not true.

“As a barometer of banking sentiment, this survey shows the distress felt by lenders across the region in response to increasing pressure on European banks and consumer lenders to restore portfolio growth against a daunting backdrop of Eurozone concerns,” said Patrick Desmares, secretary general of Efma, a non-profit association formed by bankers and insurers.