TransUnion: Consumer Credit Market Withstands Coronavirus Challenges

TransUnion, Chicago, reported the total percentage of accounts  in “financial hardship” status dropped during July for mortgages, auto loans, credit cards and personal loans – marking the first such decrease since the start of the COVID-19 pandemic.

TransUnion found that while fewer accounts are in financial hardship status as of late, credit performance has continued to hold steady and has not shown a material deterioration. The report defines accounts in financial hardship by factors such as a deferred payment, forbearance program, frozen account or frozen past due payment.

“Overall the consumer credit market has been performing quite well despite the obvious challenges brought on by the COVID-19 pandemic,” said Matt Komos, vice president of research and consulting with TransUnion. “It’s a reassuring sign that delinquency levels have remained relatively low – especially as the percentage of consumers in financial hardship status has started to decline. “

Komos said TransUnion still expects to see future delinquencies rise based on macroeconomic factors. “It is clear that government stimulus programs and accommodation programs provided by lenders are helping the market withstand these challenges in the near-term,” he said.

The report said the percentage of accounts in financial hardship appeared to hit their peak during May and June – a time when many consumers were feeling the combined impacts of reduced work hours, shelter-in-place orders, unemployment and dwindling stimulus funds. The recent reduction in account hardship levels may indicate that the number of consumers in financial distress has leveled off as performance for these products has maintained steady levels.

Serious delinquencies (60 – 90 days past due) showed a month-over-month improvement from June 2020 to July 2020 across most credit products. Credit card, mortgage and personal loans also showed a substantial year-over-year decline in delinquency compared to performance in July 2019. The presence of federal programs and those provided by lenders, however, may have alleviated some of the financial hardship borrowers are facing.

TransUnion said another positive sign from the report can be found via the 30-day delinquency metric – typically an early red flag that an account will default and potentially be charged off. These delinquency levels have shown signs of improvement in the month of July across auto, credit card, mortgage and personal loans compared to June as well as one year ago.

Despite this, TransUnion’s latest Financial Hardship Survey from late July found that 57% of Americans have been financially impacted by the COVID-19 pandemic. Of those consumers, 77% said they are concerned about their ability to pay bills and loans. They expect they will not be able to pay their bills or loans in about six weeks and anticipate an average budget shortfall of around $875. The level of concern is now at its highest level since TransUnion began tracking this variable in late March.

“As more accounts come out of financial hardship status, lenders will be actively monitoring payment behaviors to gauge whether consumers can withstand these economic pressures and do so without government assistance or lender support. How consumers are able to manage debt levels and access to credit will be a key indication of economic recovery in the coming months,” Komos said.

Specifically to mortgages, TransUnon said with interest rates hitting their lowest level in three years, mortgage originations spiked in the first quarter and reached 2.2 million, 80% higher than a year ago. Of these originations, 51% were purchase originations and the remaining 49% were refinance originations – compared to last year where 74% were purchase originations and 26% were refinance originations.

“In Q1 2020 we observed a higher rate of origination growth for 15 and 20/25 year loans than 30 year loans for purchase mortgages,” said Joe Mellman, TransUnion Senior Vice President and Mortgage Business Leader. “Fifteen and 20/25 year purchase loans grew 52% and 53% year-over-year, while 30 year purchase loans grew 21% year-over-year. Our low interest rate environment allows borrowers to better afford higher monthly payments that come with shorter term loans. On average, the spread between the 15-year and 30-year mortgage rates in Q1 2020 was 54 basis points and consumers leapt at the chance to take advantage of that.”