Garnet Capital Advisors Blog

April 18, 2014

Plunging defaults could affect loan sales by reducing low-quality credit

U.S. consumer defaults plunged in March, and this development could affect loan sales and pricing by lowering the supply of low-quality credit.

However, student and auto loan debt both rose during the month, which could spur an increase in write-offs further down the line. Such a development would bolster the amount of charge-off debt that is available and potentially impact loan portfolios.

Major default measure drops to almost 8-year low
Data suppled by Experian and S&P Dow Jones Indices revealed that during the month, its S&P/Experian Consumer Credit Default Indices, a measure of changes in consumer credit defaults, fell to its lowest reading since July 2006.

This comprehensive index contains five separate U.S.-wide indices, which all declined in March. Credit card debt enjoyed the greatest improvement, as its default rate dropped to 2.73 percent from 3.51 percent.

Bank cards and auto loans both reached their lowest default rate on record, falling to 2.73 percent and 0.99 percent. The first mortgage default rate declined to 1.13 percent, its lowest in close to eight years.

Economic conditions strengthen
These rates fell at a time when business conditions seem to be improving. Jobless claims dropped to 300,000 last week, which represented the lowest number of these applications since May 2007, according to Bloomberg. This happened as U.S. employers have hired steadily, helping to push the jobless rate gradually lower. Consumer confidence has also been strong, rising to its highest level since July earlier this month.

Retail sales ticked higher in March, with an increase in online purchases helping to spur this change. This could easily show that consumers are more willing to open up their purse strings and make purchases.

If the situation of everyday Americans continues to get better, this development could affect loan sales by causing defaults to move even lower. David Blitzer, managing director and chairman of the Index Committee for S&P Dow Jones Indices, spoke to the business climate and its steady progress.

"Along with signs that the economy is improving, consumer credit default rates continue to gradually decline," he stated. The corporate executive also emphasized the situation got better in many different areas.

Blitzer noted that Chicago, New York, Dallas, Miami and Los Angeles all saw their default rates move lower in March.

Financial institutions that want to act on this information by getting involved in loan sales might consider contacting Garnet Capital Advisors, which has comprehensive experience in this particular area.