Crisis Averted Or Only Postponed?

Peaking at almost $800 billion in June 2020, mortgages have represented by far the largest balances in deferral programs — this is not surprising given the far greater size of outstanding mortgage debt relative to other consumer credit products. However, mortgages have also had the highest proportion of balances in deferral of any product — peaking at over eight percent in June and remaining at nearly six percent as of early November. The relatively slow runoff of mortgage deferrals has been enabled by relatively longer terms offered by most mortgage lenders, consistent with the Fannie Mae and Freddie Mac policies that allow for up to two deferrals of six months each.

At the same time, credit cards have actually represented the largest number of deferrals, given their relative ubiquity as the most commonly held credit product. But credit card accommodations have represented a smaller share of total card balances (never exceeding five percent) and have also been the shortest-lived, with more than five times as many accounts having exited these relief programs as remain in them. This relatively rapid turnover may be explained in part by lender practices, such as offering card deferrals with shorter terms, and in part by borrowers’ efforts to pay off unsecured debts entirely.

Other products, including auto loans and personal loans, have fallen between these two extremes on most dimensions, with the exception of total size metrics, where personal loans are simply less common.

This may be explained by customer disposition, as lower risk customers were more likely to exit early, as well as by lender actions, where anecdotally lenders have introduced frictions and incentives to limit further extensions to customers who remain in need. This may imply greater credit and operational challenges as the most serious hardship cases reach the end of their assistance.

This skew is most visible in mortgage, where despite the availability of six-month deferment terms, many borrowers chose to exit sooner to resume payment (for example, those who had enrolled out of abundance of caution but remained employed, or those who wanted to refinance - See Notes 2). Such borrowers who chose to exit early skewed strongly toward higher credit scores. In other products, a skew in exit rates by credit score has been weaker but still present.

Overall accommodation rates have peaked under 10 percent for all major products, whether measured on a balance-weighted basis (as shown in the first section above) or by the number of accounts. For some products such as credit cards, the account-weighted usage rate is even lower, as borrowers were less likely to request assistance on a small balance.

Still, many industry reports on deferral have been siloed by product, and leave questions as to whether the same customers are requesting across-the-board deferrals or whether customers are selective in which products they enroll. By using Experian data at the customer level, we see that most customers have in fact been selective in using these programs. Most notably, among customers with a mortgage, auto loan, and bank card, more than 75 percent of customers who enrolled in assistance did so on only one of these products.  At the same time, we see that assistance rates are generally higher among customers with higher debt levels and lower credit scores.

Customers who held multiple products were generally most likely to defer their mortgage; less likely to defer their auto loan; and least likely to defer their bank card. Nonetheless, there are customers with all three products who deferred only a bank card or auto loan. We infer that for many such borrowers in need of help, their first priority was their mortgage, since it is the largest payment and deferral terms are relatively attractive (longer term, potentially lower rate). Yet other customers may have prioritized deferring their bank card or auto loan due to convenience, awareness, or lender-specific policies.

A recent study by the New York Fed (See Notes 3) examined how households have used the one-time economic impact payments provided by the CARES Act, as well as other payments like unemployment insurance benefits received during the pandemic. While the use of assistance varied somewhat by income and other dimensions, overall consumers used assistance quite conservatively. The vast majority of economic impact payments was either saved (36 percent) or used to pay down debt (35 percent), while only 29 percent was spent on consumption.

Households receiving unemployment insurance were similarly conservative on spending, but dedicated an even larger fraction to paying down debt (48 percent), but were still able to save 23 percent of their benefit to build a savings buffer.

Another study by JPMC Institute (See Notes 4) shows the impact of this savings on customer checking balances, given the $600 supplemental benefits offered under the CARES Act through July 2020. Customers who received recurring direct deposits of unemployment benefits nearly doubled the savings in their accounts between March and July 2020, from a median of $1,920 to $3,770. However, the expiration of the $600 supplement appears to have quickly reversed this trend, bringing median balances back down to $2,540 in just one month. At this rate, such customers might deplete their savings entirely before the end of the year.

As long as customer accommodation programs have remained open to new enrollments, roll rates into delinquency have been suppressed regardless of ability to pay. But on accounts whose initial assistance program has already expired and are generally not eligible to re-enroll, their roll rates provide a more interesting signal of ability to pay.

So far, roll rates for mortgages remain low, likely reflecting the fact that most mortgage borrowers are eligible for two deferrals of six-months each — indicating that most exits from mortgage deferral thus far can be presumed voluntary.

However, roll rates for other products tell a significantly different story. Auto loans were widely offered extensions of one to three months, but not all customers have been offered a further extension beyond that point. As a result, roll rates of post-extension customers have been running at roughly double the benchmark of 2019 performance.

For unsecured credit products like personal loans and credit cards, roll rates of previously accommodated accounts began at fairly normal levels in May 2020, but have risen steadily ever since. As of October 2020, personal loan roll rates have exceeded twice the 2019 rate, while credit card roll rates have exceed 150 percent of 2019 levels. Potential drivers of this trend in performance may include a shift in the mix of voluntary versus involuntary exits from deferral programs, as well as the depletion of which customers had used to make their initial post-deferral payments.

While delinquencies remain low at the industry level, these trends reflect one of the critical reasons why lenders remain cautious in their reserves and risk appetites. As the remainder of deferrals expire, it will be important to continue closely monitoring their ability to resume payments.