June 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: June 11, 2020]
In this article:
- 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
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.
For this week’s webinar, we delivered key insights on the economy and consumer credit, taking a deeper look at the impact more specifically on mortgage lending and the secondary market. Our guest speakers this week included Sam Khater, Vice President, Chief Economist and head of Economic & Housing Research Department at Freddie Mac and Andy Davidson, President of Andrew Davidson & Co., Inc.
The economy shrunk by 5% in Q1, and it is expected to contract by over 30% in Q2, according to Khater. 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%.
To help our customers better understand the more immediate impact of the coronavirus pandemic on lending activity, Equifax recently began reporting our U.S. National Consumer Credit Trends report on a weekly basis. The information shared below reflects data from the June 1 weekly report, published June 9.
Access the latest weekly and monthly U.S. National Consumer Credit Trends report here.
Total outstanding balances on auto loans and leases are $1.370 trillion as of June 1st. This is comparable to the previous week and a 1.2% increase from February 2020 month end. The number of outstanding accounts is 89.9 million, the same level as the previous 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 0.99%, a 2.9% decrease from the prior week. When compared to February 2020 month end, it is a decrease of 17 bps.
There were 80,300 auto loans and leases, totaling $2.0 billion, originated the week ending May 31st. During that period, 10.0% of auto loans and leases were issued to consumers with a subprime credit score. These subprime accounts totaled 8.8% of balances of all auto loans and leases.
As of June 1, outstanding balances on bankcards stood at $732.9 billion, a 0.2% decrease from the prior week, and a 10.7% decrease from February 2020 month end. The number of outstanding accounts is 467.2 million, a slight decrease (-0.2%) week over week. The severe delinquency rate (share of balances 60+ DPD) is 2.23%, a 4.6% decrease from the week before, and a 12.1% 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 a seasonal variation. As of May 31, the bankcard utilization rate stood at 19.3%.
Approximately 97,200 bankcards were originated the week ending May 31. Total bankcard credit limits originated during this period were $345.5 million.
First Mortgage Portfolio
As of June 1, there were 50.98 million outstanding first mortgage loans, consistent from prior weeks. First mortgage outstanding balances have risen steadily since June 2013 ($7.747 trillion), reaching $9.590 trillion this week. The severe delinquency rate (share of balances 90+ DPD, in bankruptcy or foreclosure) is 0.62%, 2.8% lower than 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. Equifax began tracking this data in July 2005.
Approximately 7,900 first mortgages were originated in the week ending May 31st, for a total dollar amount of $1.9 billion.
Consumer Finance Portfolio
As of June 1, outstanding consumer finance balances stood at $115.3 billion, a 2.2% decrease from the prior week, and a 5.7% decrease from February 2020 month end. Outstanding consumer finance accounts dipped to 74.00 million, a 2.8% decrease, compared to February 2020 month end when it was 76.10 million. The severe delinquency rate (share of balances 60+ DPD) is 2.47% and down 15.5% as of February 2020 month end. Delinquency rates as a share of outstanding balances have been relatively stable as of late, with current delinquency rates reaching historic lows.
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.
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