Consumer Credit Market Expected to Remain Strong in 2018 Even in a Rising Rate Environment

In spite of rising interest rates, the U.S. consumer credit market is poised to perform well in 2018, with well-managed delinquencies and continued wide access to credit across all products. TransUnion’s (NYSE: TRU) 2018 consumer credit forecast found that expected increases to GDP, personal income, total employment and the Housing Price Index, among other factors, will outweigh potential negatives such as increasing interest rates and slowing vehicle sales.

“From a credit performance standpoint, mortgage loan delinquencies are the biggest story. Serious mortgage delinquency rates are expected to decline materially next year, reaching levels not seen since 2005 when TransUnion began tracking these metrics. This will be driven primarily by strong employment and rising home prices,” said Matt Komos, vice president of research and consulting for TransUnion. “Unsecured personal loan delinquencies will also see very little movement and remain significantly lower than they were five years ago. While auto loan and credit card delinquency rates are expected to rise, these delinquencies are not unplanned in the sense that lenders continue to steer their respective portfolios in a fashion that suggests they are still cautiously taking on some risk.

“Despite expected interest rate rises, the prime rate remains well below historic norms and we believe it will remain at levels that can still be well managed by most consumers,” added Komos. “Expected balance growth across all products is a reflection of strong consumer sentiment rather than an indicator of consumers struggling to keep up with their obligations. Coupled with expectations of a strong economy, the consumer credit market is projected to remain on a healthy trajectory.”

5-Year Trends: Serious Borrower-Level Delinquency Rates for Key Credit Products**

*Projections; **Serious mortgage, auto loan and personal loan delinquencies are defined here as those with payments 60 or more days past due. Serious credit card delinquencies are defined as those with payments 90 or more days past due.

For more information about the 2018 TransUnion forecast and to register for a webinar providing detailed projections, please visit www.transunioninsights.com/IIR. A direct link to the 2018 consumer credit forecast webinar may be found here.

Inside the Mortgage Forecast

Three Trends for 2018

1. Delinquencies hitting 2005 levels. As housing prices rise and total employment figures improve, the serious mortgage delinquency rate (60+ DPD) is expected to drop to 1.65% by the end of 2018, the lowest level observed since 2005 (the first year TransUnion began tracking this statistic), down from a rate of 1.91% for Q3 2017. Additional factors impacting lower mortgage delinquency rates include increases to the labor participation rate, median household income, and home equity levels. Consumer-level mortgage delinquency rates have now declined almost every quarter since peaking at 7.21% in Q1 2010. At that time, there were 60.1 million mortgage accounts. Since then, the total number of accounts dropped to a low of 52.0 million in Q4 2016. The current number of accounts is 52.7 million, loosely flat over the last three quarters, indicating roughly an equal number of accounts are being paid off as are being originated.
2. Rising rates and refinancing. With interest rate increases expected in 2018, TransUnion believes there will be a continued reduction in the share of refinanced mortgages as a percentage of all mortgages. Industry forecasts have refi share dropping from 35% in 2017 to 28% in 2018.
3. Return of HELOCs. While increased interest rates will likely slow down refinancing activity, with rising home prices TransUnion expects to see many more homeowners tapping into their home equity. TransUnion forecasts approximately 1.6 million HELOC originations in 2018 and about 10 million through 2022. This is in stark contrast to the previous five-year period, when less than half that number were originated—4.8 million HELOCs were opened between 2012 and 2016. TransUnion believes the three largest uses for these new HELOCs will be: 1) debt consolidation to a lower interest rate; 2) financing a large expense, such as a home improvement, and 3) refinancing an existing HELOC or Home Equity Loan.

Instant Analysis

“Rising home prices, solid underwriting criteria, and a strong economy have led to an extremely low level of risk in the mortgage industry, which will likely continue into 2018. While housing demand is expected to remain strong headed into the new year, the question will be how much of a purchase headwind will we face with tight supply of entry-level housing, rising interest rates, and expensive ‘move up’ options. Many existing homeowners, already having refinanced into a low-interest rate mortgage, may be unwilling or unable to ‘move up’ due to how expensive housing has become. That lack of mobility can, in turn, put pressure on the supply of entry-level housing. Additionally, there is uncertainty regarding the potential impact of current tax reform efforts. One potential upside may be felt in HELOC lending, as more homeowners opt to upgrade their existing housing through home improvement, as opposed to moving into a new home. Though HELOCs were somewhat forgotten over the past five years, this, combined with record levels of home equity, will likely lead to a HELOC resurgence in the next few years.”

• Joe Mellman, senior vice president and TransUnion’s mortgage line of business leader

60-Day+ Mortgage Delinquency Rate and Average Mortgage Debt per Borrower

*Q4 2017 and Q4 2018 include projections

Inside the Credit Card Forecast

Three Trends for 2018

1. Risk distribution stabilizing? The rise in subprime and near prime credit card originations in 2016 and the first part of 2017 will continue to impact the serious credit card delinquency rate. However, the risk distribution of new accounts is stabilizing and has recently been moving toward near prime and better, which keep delinquencies at manageable levels.
2. Delinquencies to tick up. The rate of severe delinquency (90+ DPD) per consumer is expected to increase by 10 basis points to conclude 2018 at 1.96%. This would mark the fourth consecutive annual rise, though serious delinquencies are expected to remain well below recession levels – nearly 3% at the end of 2009. The largest driver for an increase in delinquencies on a macroeconomic level is the expected increase in the prime interest rate.
3. Consumer credit card debt to rise slightly. The average card balance per consumer is expected to continue to rise, driven by higher total employment and median household income. While TransUnion is forecasting only about a 1% yearly rise, this would constitute the fifth consecutive annual increase.

Instant Analysis

“The credit card marketplace is a strong example of the risk-reward paradigm of credit. Lenders are continually looking for the right balance – providing credit cards to both the least risky and higher-risk consumers in the most prudent manner while also trying to control risk and generate reasonable returns for investors. Yes, delinquencies are slowly rising, but it’s happening at a time when many lenders feel they have the confidence to take on some risk. While the overall loss rate is also going up, the loss rate is expected to increase at a slower pace in 2017-2018 versus the compound annual growth rate since 2014.

The data support their efforts: the subprime risk group only constitutes about 10.6% of all credit card accounts as of the third quarter of 2017. While higher than the previous year – 9.9% in the third quarter of 2016 – it still falls well short of levels observed during the recession, when 13.4% of all credit cards went to subprime consumers in the third quarter of 2009. On the balance front, we continue to see moderate increases, but this is to be expected as consumer confidence and GDP continue to strengthen.”

• Paul Siegfried, senior vice president and TransUnion’s credit card line of business leader

90-Day+ Credit Card Loan Delinquency Rate and Average Credit Card Loan Debt per Borrower

*Q4 2017 and Q4 2018 include projections

Inside the Auto Finance Forecast

Three Trends for 2018

1. Delinquency rate increase to slow down. Serious delinquency rates (60+ DPD) will continue their upward climb, but at a more modest pace and remain below the peak levels seen in 2008-2009. The pullback in prime, near prime and subprime segments has led to a share shift in favor of prime plus and super prime segments by 2.3 percentage points. We expect this trend to continue in 2018. The shift in lending toward lower risk consumers will help cushion the market over the next few quarters.
2. Hurricane impact and the shift to used vehicle financing. In the short-term, TransUnion expects the impact from Hurricanes Harvey and Irma to temporarily drive demand for new vehicle sales in affected markets (500,000 to 900,000 replacement vehicles). In the long-term, we expect the shift to used vehicle sales to offset some of the waning demand for new vehicle sales.
3. Larger down payments. The average amount financed for an auto loan is expected to grow at a slower rate in future quarters. Much of this has to do with the decelerating growth rate in the average balance of new loans, as lenders increasingly require larger down payments to meet certain underwriting requirements (e.g., lower loan-to-value ratios and shorter terms). This is also being impacted because of less equity in vehicles in which consumers are trading back.

Instant Analysis

“TransUnion anticipates many shifts in the auto loan market during the course of 2018. While the growth in auto loan balances is likely to continue to slow in 2018, we may see some exceptions to that trend, especially in early 2018. The impact of the hurricanes in Florida and Texas will likely result in up to 900,000 replacement vehicles being purchased, which would impact both total balances and debt per borrower in the early part of 2018. The shift from new to used vehicle purchases will also impact overall balances. As in recent years, we should see the usual seasonal shifts in serious delinquency rates. Delinquencies may fall nearly 20 basis points by the mid-point of 2018 before rising to conclude the year about three basis points higher than we expect them to be at the end of 2017.”

• Brian Landau, senior vice president and TransUnion’s auto line of business leader

60-Day+ Auto Loan Delinquency Rate and Average Auto Loan Debt per Borrower

*Q4 2017 and Q4 2018 include projections

Inside the Personal Loan Forecast

Three Trends for 2018

1. Prime and above borrowing rising. TransUnion projects unsecured personal loans to continue to grow among prime and above borrowers, leading to higher balances and lower delinquency rates. The share of personal loans issued to subprime borrowers has been dropping in recent years. In Q3 2017 (latest quarter available), this percentage stood at 26.3%, down from 27.6% in Q3 2016. Five years ago (Q3 2012), 29.7% of all personal loans were held by subprime borrowers.
2. Delinquencies stable. As originations skew toward lower-risk consumers, delinquency levels should remain about the same – shifting from an expected 3.37% at the end of 2017 to 3.36% to close 2018. With that projection, personal loan delinquencies may drop on an annual year-end basis for the second consecutive year after reaching 3.83% to close 2016.
3. More growth expected. While FinTechs continue to increase their share of the personal loan market, TransUnion expects to see more activity in this space by both banks and credit unions as a competitive reaction. This should lead to even more growth in balances and volume of loans.

Instant Analysis

“The consumer lending industry has moved past the difficulties of 2016, when FinTech lenders encountered funding challenges and subprime finance companies were facing regulatory uncertainty resulting from the CFPB’s pending small dollar rule. The volume of unsecured personal loans has rebounded exceptionally well in 2017; we expect more of the same in 2018, especially as banks and credit unions place a larger emphasis on this loan type. The fact that originations are skewing toward lower-risk consumers bodes well for the overall delinquency rate, and is especially important as consumer debt per borrower is expected to extend to nearly $8,500. This is significant considering that it would prove to be a 35% increase from levels seen just a few years ago at the end of 2013.”

• Jason Laky, senior vice president and TransUnion’s consumer lending line of business leader

60-Day+ Personal Loan Delinquency Rate and Average Personal Loan Debt per Borrower

*Q4 2017 and Q4 2018 include projections

TransUnion’s Forecast

TransUnion’s forecasts are based on various economic assumptions, such as gross domestic product, home prices, personal disposable income and unemployment rates. The forecasts could change if there are unanticipated shocks to the economy, such as if home prices unexpectedly fall. Better-than-expected improvements in the economy, such as precipitous drops in unemployment, could also impact these forecasts.

About TransUnion (NYSE: TRU)

Information is a powerful thing. At TransUnion, we realize that. We are dedicated to finding innovative ways information can be used to help individuals make better and smarter decisions. We help uncover unique stories, trends and insights behind each data point, using historical information as well as alternative data sources. This allows a variety of markets and businesses to better manage risk and consumers to better manage their credit, personal information and identity. Today, TransUnion has a global presence in more than 30 countries and a leading presence in several international markets across North America, Africa, Latin America and Asia. Through the power of information, TransUnion is working to build stronger economies and families and safer communities worldwide.

We call this Information for Good^SM. http://www.transunion.com/business