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I received a question on the blog entry “Signs of Life in the Credit Universe,” from Faye Taylor, CDPE:
I am absolutely amazed at [these] statistics. With all the foreclosures, unemployment and shadow inventory, I cannot believe that people are less delinquent on loans. Also consumer debt is down? How? I would think people lived off credit cards when they were in a crunch situation.
Faye asks a great question, and it illustrates the difference between how people perceive the credit crisis and how people are reacting with their finances.
What’s Happening With Loan Delinquencies?
Loan delinquencies trended upward in 2009, but they’ve peaked for the majority of loan types—auto loans, credit cards, HELOCs, and even mortgages. Student loan delinquencies have not peaked and are still increasing.
Typically, increases in the dollar delinquency rate (the number of loans with delinquent payments divided by the number of loans) were influenced by increases in both incidence and average size of delinquencies. The size of the delinquency speaks to the financial stress and higher degree of leverage of some consumers.
Lenders anticipated rising delinquency, notably after late 2008, by managing risk. They were much tighter with their lending standards, which also helped contain delinquency rates.
With open-end, or revolving, credit, lenders have several tangible ways to control risk. They can refrain from credit line increases or can decrease lines. They can close cards and, in economic downturns, also close inactive cards, even on those who are “good risk” consumers. Card lenders can be more selective on new risk through card offers.
Lenders of closed-end, or installment, loans have less risk controls and typically rebalance risk through new loan underwriting.
What’s Happening with Debt?
Consumer debt has been decreasing for almost two years. How? Consumers are decreasing their financial leverage voluntarily (by paying down debt) and involuntarily (by not paying), and lenders are extending credit more selectively. During the recession, consumer delinquency and derogatory behavior increased, which explains part of the debt reduction.
However, not all consumers experienced material adverse financial stress (delinquencies, write-offs). There is evidence that these consumers became more conservative in their financial behaviors, including how they manage debt.
Approximately half of consumers with at least two credit accounts in their credit file entered and weathered the recession without material degradation to their consumer credit files. Of these consumers, fewer sought and opened new credit—consumer or lender driven. In this same consumer population, balance ranges shifted from higher to lower—without resorting to delinquencies or write-offs.
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