Tag: credit trends

Experian's most recent Credit Trends study analyzing current debt levels and credit scores in the top 20 major U.S. metropolitan areas found that Detroit, Michigan, residents have the lowest average debt ($23,604) and Dallas, Texas, residents have the highest average debt ($28,240).1

A recent survey focusing on the credit behavior of Millennials (age group 18 to 30) shows that 90 percent are familiar with cosigning and two-thirds have used a cosigner in the past.

While VantageScore® credit score super-prime consumers carried the lowest average credit card balance of all credit tiers in Q4 2012 ($2,581), this group experienced the greatest average balance increase (6 percent) when compared with the previous quarter. All other credit tiers had little or no change to their average credit card balance.

Experian Automotive's Q4 2012 credit trends analysis found that 60-day delinquencies rose from 0.72 percent in Q4 2011 to 0.74 percent in Q4 2012. It was the first time in three years that 60-day delinquencies experienced a year-over-year increase.

With the constant (and improving!) changes in the consumer credit landscape, understanding the latest trends is vital for institutions to validate current business strategies or make adjustments to shifts in the marketplace.  For example, a recent article in American Banker described how a couple of housing advocates who foretold the housing crisis in 2005 are now promoting a return to subprime lending. Good story lead-in, but does it make sense for “my” business?  How do you profile this segment of the market and its recent performance?  Are there differences by geography?  What other products are attracting this risk segment that could raise concerns for meeting a new mortgage obligation?   There is a proliferation of consumer loan and credit information online from various associations and organizations, but in a static format that still makes it challenging to address these types of questions. Fortunately, new web-based solutions are being made available that allow users to access and interrogate consumer trade information 24x7 and keep abreast of constantly changing market conditions.  The ability to manipulate and tailor data by geography, VantageScore risk segments and institution type are just a mouse click away.  More importantly, these tools allow users to customize the data to meet specific business objectives, so the next subprime lending headline is not just a story, but a real business opportunity based on objective, real-time analysis.

Mortgage origination volumes increased to $427 billion in Q4 2011 – a 31 percent quarterly gain. However, overall 2011 originations of $1.35 trillion were 16 percent lower than 2010 volumes. Sign up to attend our upcoming Webinar, which will focus on current credit trends and feature a closer look at the overleveraged consumer. Source: Experian-Oliver Wyman Market Intelligence Reports.

Up to this point, I’ve been writing about loan originations and the prospects and challenges facing bankcard, auto and real estate lending this year.  While things are off to a good start, I’ll use my next few posts to discuss the other side of the loan equation: performance. If there’s one thing we learned during the post-recession era is that growth can have consequences if not managed properly.  Obviously real estate is the poster child for this phenomenon, but bankcards also realized significant and costly performance deterioration following the rapid growth generated by relaxed lending standards. Today, bankcard portfolios are in expansion mode once again, but with delinquency rates at their lowest point in years.  In fact, loan performance has improved nearly 50% in the past three years through a combination of tighter lending requirements and consumers’ self-imposed deleveraging.   Lessons learned from issuers and consumers have created a unique climate in which growth is now balanced with performance. Even areas with greater signs of payment stress have realized significant improvements.   For example, the South Atlantic region’s 4.2% 30+ DPD performance is 11% higher than the national average, but down 27% from a year ago.   Localized economic factors definitely play a part in performance, but the region’s higher than average origination growth from a broader range of VantageScore® credit score consumers could also explain some of the delinquency stress here. And that is the challenge going forward: maintaining bankcard’s recent growth while keeping performance in check.  As the economy and consumer confidence improves, this balancing act will become more difficult as issuers will want to meet the consumer’s appetite for spending and credit.  Increased volume and utilization is always good for business, but it won’t be until the performance of these loans materializes that we’ll know whether it was worth it.

The strongest growth in new bankcard accounts is occurring in the near-prime and subprime segments of VantageScore® credit score C, D and F. Year-over-year (Q1 2011 over Q1 2010) growth rates of 20 percent, 46 percent and 53 percent were observed for each of the respective tiers. Listen to our recent webinar featuring bankcard credit trends Source: Experian-Oliver Wyman Market Intelligence Reports

In my last two posts on bankcard and auto originations, I provided evidence as to why lenders have reason to feel optimistic about their growth prospects in 2012.  With real estate lending however, the recovery, or lack thereof looks like it may continue to struggle throughout the year. At first glance, it would appear that the stars have aligned for a real estate turnaround.  Interest rates are at or near all-time lows, housing prices are at post-bubble lows and people are going back to work with the unemployment rate at a 3-year low just above 8%. However, mortgage originations and HELOC limits were at $327B and $20B for Q3 2011, respectively.  Admittedly not all-time quarterly lows, but well off levels of just a couple years ago.  And according to the Mortgage Bankers Association, 65% of the mortgage volume was from refinance activity. So why the lull in real estate originations?  Ironically, the same reasons I just mentioned that should drive a recovery. Low interest rates – That is, for those that qualify.  The most creditworthy, VantageScore® credit score A and B consumers made up nearly 77% of the $327B mortgage volume and 87% of the $20B HELOC volume in Q3 2011.  While continuing to clean up their portfolios, lenders are adjusting their risk exposure accordingly. Housing prices at multi-year lows - According to the S&P Case Shiller index, housing prices were 4% lower at the end of 2011 when compared to the end of 2010 and at the lowest level since the real estate bubble.  Previous to this report, many thought housing prices had stabilized, but the excess inventory of distressed properties continues to drive down prices, keeping potential buyers on the sidelines. Unemployment rate at 3-year low – Sure, 8.3% sounds good now when you consider we were near 10% throughout 2010.  But this is a far cry from the 4-5% rate we experienced just five years ago.   Many consumers continue to struggle, affecting their ability to make good on their debt obligations, including their mortgage (see “Housing prices at multi-year lows” above), in turn affecting their credit status (see “Low interest rates” above)… you get the picture. Ironic or not, the good news is that these forces will be the same ones to drive the turnaround in real estate originations.  Interest rates are projected to remain low for the foreseeable future, foreclosures and distressed inventory will eventually clear out and the unemployment rate is headed in the right direction.  The only missing ingredient to make these variables transform from the hurdle to the growth factor is time.

While retail card utilization rates decreased slightly in Q3 2011, retail card delinquency rates increased for all performance bands (30-59, 60-89 and 90-180 days past due) in Q3 2011 after reaching multiyear lows the previous quarter. Listen to our recent Webinar on consumer credit trends and retail spending. Source: Experian-Oliver Wyman Market Intelligence Reports

If you attended any of our past credit trends Webinars, you’ve heard me mention time and again how auto originations have been a standout during these times when overall consumer lending has been a challenge.   In fact, total originated auto volumes topped $100B in the third quarter of 2011, a level not seen since mid-2008. But is this growth sustainable?  Since bottoming at the start of 2009, originations have been on a tear for nearly three straight years.  Given that, you might think that auto origination’s best days are behind it.   But these three key factors indicate originations may still have room to run: 1.       The economy Just as it was a factor in declining auto originations during the recession, the economy will drive continued increases in auto sales.  If originations were growing during the challenges of the past couple of years, the expected improvements in the economy in 2012 will surely spur new auto originations. 2.       Current cars are old A recent study by Experian Automotive showed that today’s automobiles on the road have hit an all-time high of 10.6 years of age.  Obviously a result of the recent recession, consumers owning older cars will result in pent up demand for newer and more reliable ones. 3.       Auto lending is more diversified than ever I’m talking diversification in a couple of ways: Auto lending has always catered to a broader credit risk range than other products.  In recent years, lenders have experimented with moving even further into the subprime space.   For example, VantageScore® credit score D consumers now represent 24.4% of all originations vs. 21.2% at the start of 2009.   There is a greater selection of lenders that cater to the auto space.  With additional players like Captives, Credit Unions and even smaller Finance companies competing for new business, consumers have several options to secure a competitively-priced auto loan. With all three variables in motion, auto originations definitely have a formula for continued growth going forward.  Come find out if auto originations do in fact continue to grow in 2012 by signing up for our upcoming Experian-Oliver Wyman credit trends Webinar.  

By: Staci Baker Just before the holidays, the Fed released proposed rules, which implement Sections 165 and 166 of the Dodd-Frank Act. According to The American Bankers Association, “The proposals cover such issues as risk-based capital requirements, leverage, resolution planning, concentration limits and the Fed’s plans to regulate large, interconnected financial institutions and nonbanks.” How will these rules affect you? One of the biggest concerns that I have been hearing from institutions is the affect that the proposed rules will have on profitability. Greater liquidity requirements, created by both the Dodd-Frank Act and Basel III Rules, put pressure on banks to re-evaluate which lending segments they will continue to participate in, as well as impact the funds available for lending to consumers.   What are you doing to proactively combat this? Within the Dodd-Frank Act is the Durbin Amendment, which regulates the interchange fee an issuer can charge a consumer. As I noted in my prior blog detailing the fee cap associated with the Durbin Amendment, it’s clear that these new regulations in combination with previous rulings will continue to put downward pressures on bank profitability. With all of this to consider, how will banks modify their business models to maintain a healthy bottom line, while keeping customers happy? Over my next few blog posts, I will take a look at the Dodd-Frank Act’s affect on an institution’s profitability and highlight best practices to manage the impact to your organization.

As we kick off the new year, I thought I’d dedicate a few blog posts to cover what some of the consumer credit trends are pointing to for potential growth opportunities in 2012, specifically on new loan originations for bankcard, automotive and real estate lending. With the holiday season behind us (and if you’re anything like me, you have the credit card statements to prove it!), I thought I’d start off with bankcards for my first post of the year. Everyone’s an optimist at the start of a new year and bankcard issuers have a right to feel cautiously optimistic about 2012 based on the trends of last year.  In the second quarter of 2011, origination volumes grew to nearly $47B, up 28% from the same quarter a year earlier.  Actually, originations have been steadily growing since the middle of 2010 with increasing distribution across all VantageScore risk bands and an impressive 42% increase in A paper volume.  So, is bankcard the new power portfolio for growth in 2012? The broad origination risk distribution may signal the return of balance-carrying consumers (aka:  revolvers) from those that pay with credit cards, but pay off the balance every month (aka: transactors).  The tighter lending criteria imposed in recent years has improved portfolio performance significantly, but at the expense of interest fee profitability from revolver use.  This could change as more credit cards are put in the hands of a broader consumer risk base.  And as consumer confidence continues to grow, (it reached 64.5 in December, 10 points higher than November according to the Conference Board) , consumers in all risk categories will no doubt begin to leverage credit cards more heavily for continued discretionary spend, as highlighted in the most recent Experian – Oliver Wyman quarterly webinar. Of course, portfolio growth with the increased risk exposure requires a watchful eye on the delinquency performance of outstanding balances.  We continue to be at or near historic lows for delinquency, but did see a small uptick in early stage delinquencies in the third quarter of 2011. That being said, issuers appear to have a good pulse on the card-carrying consumer and are capitalizing on the improved payment behavior to maximize their risk/reward payoff.   So all-in-all, strong 2011 results and portfolio positioning has set the table for a promising 2012.  Add an improving economy to the mix and card issuers could shift from cautious to confident in their optimism for the new year.  

With the raising of the U.S. debt ceiling and its recent ramifications consuming the headlines over the past month, I began to wonder what would happen if the general credit consumer had made a similar argument to their credit lender. Something along the lines of, “Can you please increase my credit line (although I am maxed out)? I promise to reduce my spending in the future!” While novel, probably not possible. In fact, just the opposite typically occurs when an individual begins to borrow up to their personal “debt ceiling.” When the amount of credit an individual utilizes to what is available to them increases above a certain percentage, it can adversely affect their credit score, in turn affecting their ability to secure additional credit. This percentage, known as the utility rate is one of several factors that are considered as part of an individual’s credit score calculation. For example, the utilization rate makes up approximately 23% of an individual’s calculated VantageScore® credit score. The good news is that consumers as a whole have been reducing their utilization rate on revolving credit products such as credit cards and home equity lines (HELOCs) to the lowest levels in over two years. Bankcard and HELOC utilization is down to 20.3% and 49.8%, respectively according to the Q2 2011 Experian – Oliver Wyman Market Intelligence Reports. In addition to lowering their utilization rate, consumers are also doing a better job of managing their current debt, resulting in multi-year lows for delinquency rates as mentioned in my previous blog post. By lowering their utilization and delinquency rates, consumers are viewed as less of a credit risk and become more attractive to lenders for offering new products and increasing credit limits. Perhaps the government could learn a lesson or two from today’s credit consumer.

By: Staci Baker As the economy has been hit by the hardest recession since the Great Depression, many people wonder how and when it will recover.  And, once we start to see recovery, will consumer credit return to what it once was? In a recent Experian-Oliver Wyman Market Intelligence Report quarterly webinar, 70% of the respondents in a survey said they believe consumer debt will return to pre-2008 levels.  Clearly, many believe that consumer spending and borrowing will return, despite the fact that consumer credit card borrowing recently declined for the 24th straight month*. Assuming that this optimism is valid, what can credit card lenders do to evaluate the risk levels of potential customers as they attempt to grow their portfolios? For lenders, determining who needs credit, as well as whom to lend to in this economic environment, can be quite challenging.  However, there are many tools available to assist lenders in assessing credit risk and growing their portfolio. Many lenders look at a consumer’s credit score, such as the tri-bureau VantageScore, to evaluate their credit worthiness. By utilizing an individual’s VantageScore, a lender is able to determine potential customer risk levels. Another way to evaluate a consumer’s credit worthiness is to evaluate a population using credit attributes.  Based on the attributes a lender is looking for in their portfolio, they can see improvement in evaluating risk prediction in their portfolio using pre-determined attributes, especially those specifically designed for the credit card industry. There are also models that can help lenders predict when a consumer is likely to be in the market for a new loan or account. Experian’s In the Market Models provide lenders with product-specific segmentation tools that can be combined with risk scores to enhance the efficiency and effectiveness of their offers. To identify the optimal cross-sell and line management decisions based on an individual customer’s risk score and potential value, a lender can also utilize optimization tools.  Optimization, combined with a viable risk management strategy, can assist a lender to achieve a healthy portfolio growth in a highly constrained environment. Although lenders will need to determine the best method to meet their objectives, these are just a few of the many tools available that will assist them in correctly growing their lending portfolios. ____________________ * http://www.usatoday.com/money/economy/2010-10-07-consumer-credit_N.htm