First-mortgage default rate on the rise

Job losses and higher spending needs may drive consumer defaults in the coming months

First-mortgage default rate on the rise
Default rates for first mortgages increased in August from July along with the second consecutive monthly increase for the composite consumer credit-default rate, according to the Consumer Credit Default Indices released by S&P Dow Jones Indices and Experian.

The consumer credit default rate for first mortgages was 0.65% in August, up three basis points from 0.62% in July and down three basis points from 0.68% in August 2016. The composite rate increased three basis points to 0.86% from July’s 0.83%, and rose one basis point from 0.85% in the year-ago period.

The default rate for second mortgages was 0.50%, remaining unchanged from last month and decreasing from the 0.52% rate in August 2016.

"Overall, consumer credit defaults show no reason for alarm," said David Blitzer, managing director and chairman of the index committee at S&P Dow Jones Indices. "Defaults on first mortgages are flat to down while defaults on auto loans have risen slightly in recent months. Consumer credit defaults on bank cards continue their upward creep since the end of 2015 despite a recent drop. The combination of an improving labor market, low inflation, and low interest rates are the principal factors behind currently favorable consumer credit conditions.

The bank-card default rate was 3.19% in August, down 12 basis points from July. Defaults on auto loans were at a rate of 0.95%, up nine basis points from 0.85% last month.

"Some future developments could affect consumer credit defaults: Auto sales have fallen since December 2016 and are down 11%,” Blitzer said. “Declining auto sales and the normal end-of-model year push to make room for new cars may encourage easier credit conditions and raise concerns about future defaults. Hurricane damage in Houston and across Florida is creating substantial financial stress. The impact on mortgages on damaged or destroyed homes is not yet clear. Job losses and rising spending needs could lead to increased consumer credit defaults in coming months."

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