Consumer Delinquencies May Surge As Jobless Rate Heads To 10%
06 März 2009 - 7:35PM
Dow Jones News
The leap in the unemployment rate to 8.1% in February is
expected to have an outsized negative impact on loans made to
consumers and businesses.
As the unemployment rate treks higher - expected to hit 9% by
year end and 10% next year - auto, credit card, home and commercial
real estate loans are expected to see a corresponding spike in
delinquencies and defaults.
That could add unwelcome pressure to already fragile markets and
undo efforts by regulators to stimulate consumer lending to get the
economy back on its feet. Consumer spending accounts for 70% of the
U.S. economy.
Unemployment and higher default rates "move in tandem," said
Mike Dean, managing director and head of consumer asset-backed
securities at Fitch Ratings.
"We expect record delinquencies to continue for the foreseeable
future on consumer loans as the consumer's credit quality worsens,"
he added.
Currently, the 60-day delinquencies on credit card loans is
nearly 4%, up from the low 3% range it held at last spring.
"A lot of times, credit card performance variables are a leading
indicator reflecting the strain and stresses on the consumer in the
economic cycles," Dean said.
Similarly, chargeoff rates on cards - loans that have been
written off as uncollectable - have shot up to 7.5%, and are
expected to hit 9% by year end.
The rapid rise in the unemployment rate is the cause of this
unexpected turn south in the finances of consumers. The
unemployment rate has increased 3.30 percentage points from the
year-ago level, its largest year-on-year increase since June 1975.
And, at 8.1%, it is back at December 1983 levels.
Job losses combined with falling home prices and a decline in
availability of loans to consumers have left those who have lost
their job with few options. Typically, borrowers try to sell their
home to make ends meet when unemployed, but given current market
conditions, that is not a feasible option.
If unemployment rises to 9%, Fitch expects a 20% increase in
credit card charge-offs and a 24% increase in auto loan cumulative
net losses.
Similarly, Barclays estimates a 35% increase in mortgage losses
for every percentage point increase in unemployment levels.
The rising tide of joblessness already has dragged homeowners
with good credit into the quagmire of delinquencies and
foreclosures. Mortgage finance giants Fannie Mae (FNM) and Freddie
Mac (FRE) have reported a sharp spurt in delinquency rates on prime
mortgages they guarantee in the last couple of months to record
levels of 2%, a nearly 1.50 percentage point jump.
Policy makers are trying to stem the wave of defaults and
foreclosures. The Obama administration's massive stimulus program
includes a plan to help struggling home owners, while the Federal
Reserve is seeking to keep mortgage rates low by buying up
mortgage-backed securities. And Treasury and the Fed this week
launched their latest facility - the Term Asset-Backed Lending
Facility - which is aimed at supporting consumer lending.
The drop in consumer spending also has a widespread impact on
the fate of commercial properties, Fitch said. Retail stores are
closing at a fast pace, multifamily rentals are losing tenants, and
hotels are reporting almost a one-fourth drop in room occupancy
rates from the peak.
Fitch says states with higher unemployment rates tend to have a
higher default rate on loans underlying commercial mortgage-backed
securities.
For instance, multifamily loans in these states have a default
rate of 4.1%, retail loans 1.2%, and office loans 0.65%. All of
this is about 40% to 50% more than the current national
averages.
-By Prabha Natarajan, Dow Jones Newswires; 201-938-5071;
prabha.natarajan@dowjones.com