Interest Rate Roundup

Tuesday, July 03, 2007

ABA figures confirm delinquencies on the rise

The American Bankers Association produces a quarterly report on delinquency trends for several types of loan products. They include credit cards, direct auto loans (loans made through banks) and indirect auto loans (loans obtained through car dealers), and home equity loans and lines of credit. The latest figures for Q1 2007 were just released. They showed:

* The composite delinquency rate (for all eight types of closed-end consumer loans) rose to 2.42% from 2.23% in Q4 2006 and 1.94% in Q1 2006. That's the worst reading in almost six years -- since Q2 2001 (2.51%).

* The delinquency rate on home equity loans popped up to 2.15% from 1.92% in Q4 2006 and 1.94% a year earlier. That's the highest rate since Q3 2005 (2.33%).

* The DQ rate on home equity lines of credit rose to 0.60% from 0.57% in Q4 2006 and 0.55% in Q1 2006. That's the highest since Q2 2003 (0.63%).

* Direct auto loan delinquencies ticked lower, as did credit card delinquencies. But indirect auto loans showed deterioration, with the DQ rate there rising to 2.73% from 2.57% in Q4 2006 and 2.04% in Q1 2006. That's the worst performance for that category since Q2 1997 (2.74%).

These figures confirm what we already know from federal delinquency figures, the FDIC's Quarterly Banking Profile, and the Mortgage Bankers Association's numbers -- credit quality is worsening. The housing slump is a key factor:

1) It has a direct impact on home equity loan performance. Slumping home values leave more second mortgage borrowers "upside down" -- owing more on their mortgages than their homes are worth. Meanwhile, falling home sales lead to more seasoning of home equity loans. In other words, more borrowers are forced to stay put, rather than sell and pay off their home equity loans. That increases the length of time those loans are outstanding, and that tends to drive the delinquency rate higher.

2) The housing slump also an indirect impact on the performance of other loans. A major use of home equity loans over the past several years has been consumer debt refinancing. Borrowers have rolled credit card and auto loan balances into their home equity lines of credit and home equity loans in order to reduce their interest rates and monthly payments. As home prices slump, fewer borrowers can take advantage of that payment-reducing maneuver. So consumer loan delinquencies are likely to rise, especially if the employment situation worsens.


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