What is the "number one issue" if economy worsens?
Increasing delinquency rates for credit card and personal loans will rise next year to levels not seen since 2010, according to two new studies by consumer credit reporting agency, TransUnion.
The firm’s new Consumer Pulse report said that after two years of aggressive growth, delinquency rates for these two credit products had risen rapidly due to increasing interest rates and “stubbornly” high inflation amid recession fears.
In addition, the 2023 Consumer Credit Forecast predicts the impact from those economic factors will continue to be felt across mortgage loans, refinance and cash out activity.
TransUnion expects serious credit card delinquencies to rise to 2.60% at the end of 2023 from 2.10% at the end of this year, while unsecured personal loan delinquency rates are expected to increase from 4.10% to 4.30% during the same period.
Mortgage loan drop
In addition, mortgage purchase originations are expected to drop to 5.4 million in 2023, representing the lowest level in the last five years, and almost half compared to recent year totals.
Moreover, refinance originations are expected to drop to “a historical low” of just over one million for 2023.
Home equity loans expected to increase
By contrast, TransUnion’s report said there was “room for optimism” with respect to home equity loans, as they are expected to rise to 3.7 million, up by one million compared to 2022.
Joe Mellman (pictured), TransUnion’s SVP and mortgage business leader, noted that tappable home equity had grown to record highs of nearly $20 trillion this year, adding that this trend is expected to continue into 2023.
“Currently homeowners have over $600 billion in non-mortgage debt and this is anticipated to increase in 2023 as inflation takes its toll on consumer wallets. Homeowners can considerably reduce their monthly expenses by tapping their home equity to pay off existing debt,” he said.
Speaking to Mortgage Professional America (MPA) he added that home equity would counteract the impact of increased delinquency rates.
He said: “Even though (tappable) home equity is going to tick down next year, it’s still going to be sitting around $18 trillion dollars again - that’s multiple times Japan’s total economy. That tends to moderate the downside of delinquencies because consumers have a cushion and can tap into that.”
Mellman also downplayed the rise in delinquencies, pointing out that the 1.4% year over year rise was still “not very high”.
He said: “If you were to look at even prior to the housing collapse, the normal delinquency range was around 2%, which skyrocketed to 7% during the housing collapse. We’ve been below 1% for the last couple of years, so while there’s an uptick, in the overall scheme of things it’s more of a reversion to a normal range of delinquency.”
The report however warned that forecasts could change “if there are unanticipated shocks to the economy”, such as if COVID disrupted recovery efforts, home prices unexpectedly fell, or inflation continued to remain high next year.
The study also found that although more than half (52%) of people in the US are optimistic about their financial future during the next 12 months, nearly two-thirds (60%) believe the country’s economy is already in a recession or will enter a recession by the end of the year.
Number one issue - employment
Mellman said his “number one issue” was employment, as a downturn in the economy and a possible rise in unemployment would have a negative impact on existing homeowners’ ability to repay their mortgage and reduce prospective homeowners’ opportunities to purchase a home.
He said: “Those consumers (with homes) have already been underwritten, and in general will be as long as their employment picture remains stable.
“(But) most homeowners are going to be suffering something that I would call the golden handcuffs where they are locked into lower interest rate products and are (therefore) extremely unlikely to move out into a new home and ditch that low interest rate mortgage that they have. That means that there’s not a lot of homes springing up for prospective homebuyers.”
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