Loosening underwriting standards may cause trouble
Moody’s Investors Service has predicted that loan delinquencies for household debt will rise in the coming quarters.
The Federal Reserve Bank of New York reported that the rate of delinquencies was steady at 4.65% in the last quarter. However, due to loosening underwriting standards and rising interest rates impacting loan performance, Moody’s says this is a cycle low.
Total household debt, credit card debt and mortgage debt will increase modestly in the coming year, Moody’s predicts. On the flip side, the NY Fed report said auto debts have reached record levels and will remain stable.
New residential mortgage delinquencies soared by 15 basis points (at 3.55% last quarter) from last year. Moody’s said this was consistent with its prediction that delinquencies will rise.
“We expect mortgage delinquencies will increase modestly over the next year given easing underwriting standards and since slower home price appreciation will more than offset strong employment conditions,” the report said. “We expect rising interest rates will take longer to result in higher mortgage and auto loan delinquencies since existing loans are largely fixed rates.”
Balance growth for residential mortgages fell from a rate of 4.7% in the fourth quarter of 2017 to 2.7% in Q4 2018. This helped tone down the overall rate of household debt in last year, according to Moody’s.
“We expect residential mortgage originators to loosen underwriting standards for purchase loans, which will lead to modest growth in residential mortgage balances,” said the report. “With interest rates up and refinance volumes down, originators are pressed for volume.”
Given the current climate, Moody’s said a loosening in underwriting standards cannot be avoided.
“Over the last year, residential mortgage loan profitability has declined significantly as loan originations and margins have fallen given higher interest rates, and as refinance originations have plummeted,” the report said. “Therefore, we expect residential mortgage underwriting to continue loosening modestly over the next 12-18 months.”
The Moody’s report said that consumers could be at risk if lenders continue to loosen underwriting standards, which were extremely tight after the financial crisis.
“Although consumers’ financial health is generally strong, there is a risk that they will take on too much credit in the present accommodative environment,” Moody’s said.
