Delinquencies on loans expected to rise

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Bankers are predicting more debtors are likely to fall behind on their auto loans and credit card payments this year, but there may be a silver lining.

While rising delinquencies will spell trouble for those individuals who cannot make ends meet, it could — on the other hand — be a sign the overall economy is inching its way back to health.

"Given that delinquencies are so low at the moment, it really has no direction to go but to increase," said Andrew Jennings, chief analytics officer at credit reporting agency FICO and the head of FICO labs in San Rafeal, Calif. "I don't believe it's cause for concern, but something to take note of. And I think that is what risk managers are doing."

The latest quarterly survey FICO conducted with U.S. and Canadian bank risk managers found nearly half of them forecast an increase in delinquencies this year on auto loans, credit cards and all other types of consumer loans.

In the survey, 44 percent of bank managers expect delinquencies on credit cards to increase during the next six months; 35 percent of bankers said delinquencies on car loans will ramp up; and 43 percent expect delinquencies on all loans to increase. 

Mr. Jennings said the survey results do not suggest the nation is headed for another credit crisis on the level of what it experienced in 2008, but the expectations for rising delinquencies are based on where things stand today. Loans delinquent for more than 120 days are now at a 10-year low.

Only about 1 percent of outstanding loans today are more than 120 days delinquent. That compares to 2009-2010 when 120 day delinquent loans peaked at 3 percent. Historically, loans that are more than 120 days late typically account for about 2 percent of total outstanding loans, Mr. Jennings said.

The loan delinquency rate has tumbled to historic low levels partly because financial institutions closed many credit accounts during the height of the financial crisis for risk management reasons. Banks also tightened their credit standards in light of high levels of unemployment and financial stress. Meanwhile, consumers took it upon themselves to cut back on their use of credit and to pay off what they already owed. 

Mr. Jennings said a rising loan delinquency rate could also be interpreted as a healthy sign after lenders spent much of the past five years constricting credit availability and being risk adverse.

"We know the economy is recovering and extension of credit is an important part of ensuring the recovery will continue to take place and gather momentum," he said.

"These numbers mean more people are gaining access to credit. But we need to keep a close eye on the risk levels of these new loans. If delinquencies reach an uncomfortable level, we may see lenders pull back again."

Tim Grant: tgrant@post-gazette.com or 412-263-1591.


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