July Update: How to Navigate the 2020 Economy
This blog post will be continually updated with timely and relevant insights gleaned from the latest Market Pulse weekly webinar and our U.S. National Consumer Credit Trends reports. [Last update: July 29, 2020]
In this article:
- Confidence Rises on Reopenings: Housing, Auto and Savings Strong
- The Auto Industry Recovery and Alternative Data
- State of the Mortgage Industry
- Economic Contraction and Unemployment Woes
- Housing Rebound
- Consumer Credit Trends
- Housing Market Outlook
- The Shifting Tide of Marketing Strategy
- Proactive Portfolio Managing
- Scenario Forecasting
This week’s Market Pulse webinar was focused on recent economic and credit trends, consumer confidence and expectations, and finding financial durable consumers in digital channels. The Equifax team was joined by colleagues Amy Crews Cutts of AC Cutts & Associates, and Denise Dahlhoff and Gad Levanon, both from The Conference Board.
Consumer confidence rose more than expected in June as the U.S. loosened stay-at-home and quarantine restrictions, according to the latest Conference Board’s consumer confidence index. Certain consumer-centric industries like housing and auto continue to see strong sales, relative to the overall impact of the pandemic.
Home prices in May 2020 grew 4.8% year over year, while used car sale numbers increased 105.5% in May compared to the previous month. Low interest rates on new mortgages, dealer incentives and government stimulus programs are helping to stabilize housing and auto. At the same time, Americans are cutting back on spending and saving at historic levels. Consumer spending dropped 13.6% in April, the largest decline on record, while the personal savings rate hit a historic 33% during the same month. Consumer debt also continues to level off.
With rising COVID-19 cases in the U.S.and high unemployment levels, concerns about the fragility of the economy and the resilience of consumers are mounting. As we discussed during the panel, the impact may have lasting effects on behavior and certain industries.
Our recent Market Pulse webinars focused on two major credit-related topics – the lending outlook for the automotive industry and the rising use of alternative data. While our teams dove deep into each topic during separate discussions, the current state of the economy shows how these two subjects are also closely linked.
With subprime borrowers showing remarkable resilience during today’s challenging economic times, lenders are exploring ways to expand their portfolio and pool of borrowers using alternative data. The auto industry, which is being supported by an increase in subprime borrowers, is the perfect example of how alternative data can play a significant role in growing a lender’s customer base. In fact, the current strength of the U.S. consumer is fueling new ways to assess consumer credit worthiness and lift scores to help sectors like auto recover faster.
Below are some highlights from our recent webinars on auto and alternative data, as well as our latest U.S. National Consumer Credit Trends report.
Consumer Debt Flattens; Auto Spending Increases
Total consumer debt remains relatively flat at $14.2 trillion for the week ending June 14. After seven years of growth starting in mid-2013, consumer spending pulled back and debt levels stabilized as the pandemic took hold. Total consumer balances increased slightly 0.3% week over week while delinquency continued to decline 5.7%.
Total auto balances, driven by auto loans, are up 0.4% compared to Feb. 2020. Auto loan originations have rebounded after a drop in late March, and have steadily increased to reach 9,000 auto loans, totaling $335.3 million, for the week ending June 14. Auto loans represent 73.2% of all auto account originations and 86.7% of all auto origination balances for the week ending June 14.
Borrowers with weak credit scores are supporting the auto recovery, making up 10.4% of auto loans and leases as of June 14. These subprime accounts totaled 10.1% of all auto loan and lease balances.
Delinquent auto balances (60+DPD) have declined 21% from early March to June, breaking the traditional seasonal pattern. Since 2013, there has been a 25% decline in delinquencies between February and April, and then starting May and June, an increase in the 7% range. In 2020, there was a drop of 13% from February through April, and declines continue into May and June.
Jennifer Cox, Risk Solutions and Consulting Leader at Equifax, commented, “This is more than just your typical seasonal effect that you’re seeing. The other important fact here is that accommodations are being granted to consumers who are seeking relief from the impacts of COVID-19.”
The economic environment of recent months has posed challenges for industries across the board, and the mortgage industry is no exception. Yet, based on the latest trends and data, the U.S. mortgage industry appears uniquely positioned to weather this economic crisis.
The economy shrunk by 5% in Q1, and it is expected to contract by over 30% in Q2, according to Sam Khater, Vice President, Chief Economist and head of Economic & Housing Research Department at Freddie Mac. He also noted the impact on the labor market, citing historically high unemployment rates as well as the recent data showing jobs are rebounding faster than expected. Employment is 20 million below where it was in February, but it is 2.5 million off the low reported back in early April.
Khater noted the housing market’s rapid recovery. Purchase applications fell in mid April, declining 35% in Freddie Mac’s data. As of June 9th, purchase applications were up over 20% from a year ago. “It’s really remarkable that we’ve made a recovery in 10 weeks, because if you compare it to the last decade, it took over 10 years to make nearly the same recovery,” noted Khater. While housing inventory is down approximately 10%, list prices for homes that are on the market for sale have only declined by about 3%.
In addition to publishing key data and insights on the automotive industry from our recent webinar, Equifax also shares its U.S. National Consumer Credit Trends report on a weekly basis. The information shared below reflects data from the June 29, 2020 weekly report, published July 7, 2020. You can access the latest weekly and monthly U.S. National Consumer Credit Trends report here.
Total outstanding balances on auto loans and leases stood at $1.360 trillion as of June 29, consistent with prior weeks, and also a 0.5% increase from February 2020 month end. The number of outstanding accounts is 90.0 million, the same as the prior week. Ten years ago in June 2010, total auto balances stood at $722.0 billion and there were 61.4 million loans and leases outstanding accounts. The severe delinquency rate (share of balances 60+ DPD) is 0.91%, which is comparable with the previous week. When compared to February 2020 month end, it is a decrease of 25 bps.
For the week ending June 14, there were 12,300 auto loans and leases originated worth $386.9 million. The average origination balance for all auto loans and leases issued during this period was $31,464. The average subprime auto loan and lease amount was $30,473.
As of June 29, outstanding balances on bankcards stood at $728.7 billion, a slight decrease of 0.1% week over week, and an 11.2% decrease from February 2020 month end. The number of outstanding accounts is 466.1 million, down 0.1% from the prior week. The severe delinquency rate (share of balances 60+ DPD) is 2.06%, a 2.1% decrease week over week, and a 19.0% decrease from February 2020 month end when it stood at 2.54%. Card utilization has remained between 20% and 22% of total credit limits since the spring of 2011, with some seasonal variation. Bankcard utilization stood at 19.2% as of June 29 and is at a historic low since Equifax started tracking the data in 2006.
First Mortgage Portfolio
As of June 29, there were 51.02 million outstanding first mortgage loans, stable over the prior week. First mortgage outstanding balances have risen steadily since June 2013 ($7.747 trillion), reaching $9.626 trillion. The severe delinquency rate (share of balances 90+ DPD, in bankruptcy or foreclosure) is 0.58%, comparable with the prior week. Severe delinquencies are now at their lowest levels since January 2006 as a share of outstanding balances, and a new record low as a share of outstanding loans.
Consumer Finance Portfolio
As of June 29, outstanding consumer finance balances were $118.4 billion. This is a 1.4% increase week over week, and a 3.2% decrease in total balances from February 2020 month end. Outstanding consumer finance accounts were 76.41 million, a 1.2% increase week over week. The severe delinquency rate (share of balances 60+ DPD) is 2.48%, up 4.1% from the prior week. It is also a decline of 15.1% from February 2020 month end. Delinquency rates as a share of outstanding balances have been relatively stable as of late, with the current delinquency rate reaching historic lows.
Consumer Confidence Outlook
During this week’s Market Pulse webinar, Denise Dahlhoff and Gad Levanon, both from The Conference Board, shared their perspectives on the state of today’s consumer. Key takeaways from their discussion include:
- COVID-19 changed consumer habits, many of which may be permanent and have lasting impacts on spending, and a variety of industries.
- Temporary consumer shocks like supply shortages and shelter in place regulations pushed consumers toward do-it-yourself models and digital activities to manage through the health crisis.
- People making their own masks, disinfectants and tackling home repairs became major trends as consumers worked to overcome supply shortages.
- On the lockdown experience, consumers shifted to “digital everything” – from online learning and e-commerce to digital fitness classes.
- Longer-term consumer changes associated with health risks and the potential for another financial crisis may have lasting effects, impacting a cross section of industries.
- Consumers are likely to embrace social distancing behavior as a new norm, turning away from group activities like mass transit, gyms, movie theaters and retail environments.
- A weak economy will also keep consumers “value-minded” and cost conscious about premium prices, goods and experiences.
Alternative Data Trends
Executives from Urjanet and Yodlee joined our alternative data webinar and presented several points including:
- Lenders are adding new strategies around consumers who are active in the specialty finance space. Lenders are interested in how specialty finance and alternative data sets can help them with universe expansion, risk mitigation and higher campaign response rates.
- The National Consumer Telecom and Utility Exchange (NCTUE) provides insight into a consumer’s payment habits for such things as pay TV, home security, utilities, internet service and telephone.
- Using the NCTUE, which includes data on 38 million consumers who are not found in any other traditional credit file, can help increase consumer scores, especially for subprime borrowers.
- This and other alternative data sources are also increasingly being used for financial inclusion, and as a tool to help lenders better manage risk in new account acquisition and portfolio management.
- An Equifax and Yodlee analysis found that adding customer permission alternative data to traditional credit models, provided a significant lift in KS. By adding certain attributes in combination with Advantage score 3.0, data showed a 7.3% lift in KS from the general population. For sub segments such as thin file and near prime, sub prime, there was a 13.2% lift in KS and an 8.6% lift in KS for those two populations, respectively.
During this week’s Market Pulse webinar, our Equifax team was joined by Andrew Davidson,
President of Andrew Davidson & Co.. Davidson shared his forecasts and scenarios for the overall economy and housing industry, including:
Two of Davidson’s economic scenarios project a rapid snapback and then a longer pace until we get to full economic recovery.
A COVID19 resurgence is a top risk to the economy. Finding ways of social distancing in a more economically favorable way, will potentially enable the economy to open sooner.
Expectations that mortgage rates will continue to decline with Fed funds and treasury rates so low.
How servicers handle growing forbearance demands will impact how far mortgage rates will fall.
Expectations that home prices will remain stable and possibly even rise, depending on improving employment gains.
During the May 7 Market Pulse webinar, our Equifax team was joined by special guest Laura Ziemer, Director of Insights at Mintel Comperemedia. Laura discussed how to think about marketing given current economic trends and consumer behaviors. The following points were shared by Laura during the discussion:
- Financial services brands may have changed their marketing volumes in digital channels, but they are still marketing.
- Credit cards that are rooted in travel and entertainment rewards are being restructured to encourage consumers to continue using their cards during this time.
- Marketing for deposits has been relatively stable. There are a lot of communications focused on bank branch updates, and how customers can use online platforms and mobile apps for banking and deposits.
- For lending, specifically personal loans and mortgages, digital acquisition volume is up. There are a few big pushes from some key players and some challenger brands offering loans.
- Investment marketing volumes are down, but not as drastically as some categories like credit cards. Communications have been focused on the stock market with very aggressive messages and bonus offers. For example, some fintech brands are offering large $25,000 incentives for new account openings.
Laura also discussed the importance of targeting strategies in this shifting environment. She encouraged brands to think about modeling, and expects more sophistication in reaching the most credit worthy customers, through both direct mail and across the omni-channel landscape. She also expects brands to lean on social media for communicating with existing customers. In closing Laura said, “There’s a lot you can do with your first party data to communicate about things going on with branches, for example. And with that depth and bonus for deposits, people are really focused on savings and so we’re seeing a lot of competition here in terms of cash bonuses for offer strategies.”
During the May 7 Market Pulse webinar, John Fenstermaker, Equifax Vice President and Chief Innovation Architect, put our latest Credit Trends report into perspective.
Our team conducted a deep analysis on the impact of accommodation on credit scores, and ways to mitigate those impacts. By simulating different scenarios, it’s possible to measure the impact the loss of information caused by accommodation will have on credit scores.
For example, John shared the results of a recent Equifax analysis on the score distributions and score performance under six different accommodation scenarios. The results showed that even in the most extreme situation, with 12 months of accommodation applied on 50% of consumers, there are about 78% of consumers with no change to their credit score. In 89% of consumers, the change is within plus or minus 10 points. In 92% of consumers, the change is within plus or minus 20 points.
Historically, credit scores do a very good job of capturing both a consumer’s willingness to pay, and a consumer’s ability to pay. When a credit score might not reflect an ability to pay is when a consumer has had a major life change like unemployment or medical crisis. These are attributes that have a high impact on credit scores, and as a result, need to be closely monitored. Conducting regular reviews using simulated scenarios and predictive analytics can help mitigate portfolio risks and help navigate the changing economic environment.
Tune in to our weekly Market Pulse webinar series for updates on the economy, credit trends and additional timely insights aimed at helping businesses navigate these uncertain economic times.
During this unprecedented time, lenders and service providers are striving to predict losses and better manage risk in their portfolio. One of the main themes we are focused on to help them navigate this fast changing environment is a concept we call “monitoring with agility.” It’s a data-driven approach that can improve modeling and forecasting by simulating different economic scenarios. For example, on our most recent Market Pulse webinar, we conducted a forbearance simulation on credit scores. That simulation enables lenders and providers to have a better view of what a six month go forward score would look like under an individual forbearance scenario. We can do that with dozens of different elements.
Through our partnership with Moody’s, you can also take Equifax credit trends data and merge it with Moody’s economics scenarios through our CreditForecast.com platform.
Having the ability to look at different credit elements over time in various economic environments, gives you a clearer picture of potential outcomes. In this fast changing environment, we’re encouraging our clients and partners to “monitor with agility” by leveraging the power of credit data and analytics in different simulated environments.
The new Equifax Response packages have been developed from our full suite of differentiated data and solutions (including credit, alternative data, employment & income, and wealth information) to address the evolving needs of businesses in the wake of COVID-19. We’re providing a range of resources to help clients navigate this uncertain time, including:
- Equifax Response FREE provides complimentary access to economic and credit trends and tools for optimizing business performance. Abridged U.S. Credit Trends reports, webcasts with the most current market information and customer consulting are all available. The FICO Resilience Index helps lenders predict a consumer’s ability to pay during economic downturns.
- Equifax Response NOW provides context on what’s happening with businesses and consumers at a market level with access to credit trends data, economic forecasts, consumer financial behavior and employment solutions to help identify credit risks. Packages that provide comprehensive portfolio reviews including employment information and alerts from The Work Number are available.
Tune in to our weekly Market Pulse webinar series to gain the latest updates on the economy, credit trends and additional timely insights on the economy.
Recommended For You
The last six months have been a wild ride for auto marketers – auto loan marketers included. After coming to […]
BHPH Lenders Need Alternative View of Customers’ Ability to Pay It’s paramount to keep sales moving during this time, not […]
Does “Prime” Mean Perfect? Prime rib. Prime rate. Optimus Prime. Regardless of whether you’re talking about dinner, finances or robot […]
Take Note of Positive Trends Marketers are having to pivot on a dime as companies cut budgets or redirect spending […]