Garnet Capital Advisors Blog

April 10, 2014

Declining consumer delinquencies could affect loan sales

Several measures of consumer delinquency fell during the fourth quarter of last year, according to a survey conducted by the American Bankers Association.

This situation could easily point to strengthening economic conditions and the improving situations of consumers. If Americans are becoming better at managing their finances, this trend could affect loan sales by reducing the supply of charged-off debt available for sale.

Many improvements in home-related delinquency
In the final three months of 2013, every delinquency measure of the three loan categories that involved home loans - home equity lines of credit, property improvement loans and home equity loans - declined. These key measures have not all fallen at the same time since the last quarter of 2012.

The delinquency rate for home equity lines of credit dropped to 1.71 percent from 1.67 percent. Meanwhile, the share of property improvement loans with this particular status declined to 1.07 percent from 1.25 percent.

In addition, the portion of home equity loans that were delinquent during the period declined to 3.48 percent, from the previous 3.58 percent. This rate rose to as high as 4.20 percent during the third quarter of 2013, according to American Banker.

ABA official notes improving conditions
James Chessen, chief economist for the ABA, said the strengthening situation of consumers is making it easier for Americans to stay current on their loans.

"As jobs, income and household wealth improve, people have a greater capacity to meet their financial obligations," Chessen said. "Improving consumer finances and closer attention to managing debt are the key factors behind these better numbers."

A few delinquency rates measured in the poll moved higher, according to Kansas City Business Journal. For example, bank card delinquencies increased during the final quarter of 2013, rising to 2.6 percent from 2.55 percent one year earlier. However, it is worth noting that the latest rate was still far below the 15-year average of 3.81 percent.

In addition, the delinquency rates on credit cards could easily increase over the next six months, according to bank risk professionals who took part in a recent FICO survey, American Banker reported. Of the industry participants who participated, 44 percent predicted that in the coming quarters, more credit card balances will fall into delinquency. Andrew Jennings, chief analytics officer at FICO, said that this change might be a positive development.

"In some ways it's actually good news," he stated, according to the news source. "What's happening, I think, is that we are seeing some growth in lending. Inevitably some of that growth is coming from lower credit-quality populations."