In a recent report published by TransUnion, seriously late loan payments continued their decline. But 30-day late payments are on the rise. These payments are centered mainly around auto and mortgage loans.
With many consumers taking deferments on student and auto loans and mortgages, the quality of these loans has become obscured. Consumers took deferments for different reasons. Some went into deferment because of financial hardship, while others used deferments to preserve cash during the pandemic.
Those consumers who chose forbearance to preserve cash are now starting to exit these programs. This signifies that regular payments will resume for those consumers and that their loans are not at risk of default. However, consumers who aren't yet exiting forbearance programs are doing so out of necessity (i.e., loss of income). The risk of default for those loans is higher than for consumers who are not prolonging forbearance.
TransUnion wasn't sure if the increase in 30-day delinquencies was because of financial stress or difficulties reestablishing scheduled payments after exiting forbearance programs. With government safety nets now expired, TransUnion does consider a larger test of these loans is coming. Consumer financial flexibility will also become more rigid, leading to a prioritization of needs, which loans are likely not part of. Even if the government passes another stimulus bill now, many consumers are falling back on their savings to pay bills. Meaning, their financial condition is deteriorating, and stimulus may not provide enough for them to catch up.
CUNA Chief Economist Steven Rick is expecting loan delinquencies to rise in Q4 2020, followed by rising charge-offs in Q1 2021.
On a positive note, an MBA survey showed that for the week of September 13, homeowners in forbearance had dropped by 6.93% compared to the previous week. Fannie Mae and Freddie Mac mortgages showed similar results, with a 4.55% drop. These are the lowest levels in five months for Government-Sponsored Enterprises (GSE).