If you look at numbers published by the Federal Reserve, the credit card business had a fantastic year. Delinquency rates for 4Q20 were a mere 2.12%, slightly higher than 3Q20, and near historic lows.
But, everyone knows that numbers can be misleading. When you break out smaller banks, you can see the pain points, which indicate severe risk, with 5.09% delinquency.
That is why today’s read is important. A paper published by Stanford University’s Business School’s Insights acknowledges the impact of various COVID countermeasures but questions “what’s next?”
- Drawing on nationwide credit bureau data, the study estimates that some 50 million people postponed about $43 billion in loan payments between March and October of last year. By the end of March 2021, the researchers predict, 60 million people will be $70 billion behind on their payments.
- Most of those looming bills are tied to home mortgages ($3,200 on average, as of last fall), car loans ($430 on average), and student loans ($140 on average).
- Drawing on nationwide credit bureau data, the study estimates that some 50 million people postponed about $43 billion in loan payments between March and October of last year. By the end of March 2021, the researchers predict, 60 million people will be $70 billion behind on their payments.
- Most of those looming bills are tied to home mortgages ($3,200 on average, as of last fall), car loans ($430 on average), and student loans ($140 on average).
The report abstract mentions: “The team used a detailed dataset from Equifax, the credit reporting agency, that covered 20 million borrowers. The data didn’t reveal people’s names, but it did provide credit scores, payment histories, delinquencies, deferrals, and borrowers’ geographic locations. From that, the researchers estimated the nationwide totals and the kinds of people who got help.”
- The study also finds two interesting patterns related to how much relief was administered. Only 10% of eligible borrowers actually requested debt relief, which Seru says indicates that the relief went to those who truly needed it. In addition, one-third of those who were given forbearance actually kept making payments. They appeared to use the relief like a credit line that they could draw on if their situation became dire.
The author, Stanford’s Amit Seru, was aided by researchers at USC, Northwestern, and Columbia summarized the research in gloomy terms:
- We have to be careful in how we unwind this forbearance overhang,” he says. “We have the data, and policy makers need to get on how they would design such a policy. The issue of renegotiation with borrowers is difficult; it requires customization to each consumer’s situation, which requires data and can take weeks or months to design. In the meantime, many consumers could find themselves locked out of their houses. A chain of delinquencies could quickly emerge.”
As this happens, forbearances expire, markets as large as California face employment issues, environmental challenges, and long-term concerns about taxes, schools, and credit availability.
The delinquency issue will flush out. Expect 3Q21 to be a tipping point. And, it will not be pretty.
Overview by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group
