Consumer Credit Activity Continues to Rise from Pandemic Lows; Auto Loan Subprime Performance Lags

CHICAGO – Consumer credit activity picked up in the final quarter of 2020 as balances increased across most credit products and originations activity rose from the lows observed during the early stages of the COVID-19 pandemic. TransUnion’s (NYSE: TRU) newly released Q4 2020 Industry Insights Report also found subprime borrowers have followed the overall market trend, though this group’s activity has decelerated in the auto lending industry.

With many accounts expected to come out of accommodation between March and May, most notably mortgage accounts, we will soon see the true impact of those programs for both consumers and the credit marketplace.

“On the surface, the consumer credit market is performing quite well. Serious delinquency levels remain near record lows while balance and origination activity is picking up,” said Matt Komos, vice president of research and consulting at TransUnion. “Additional stimulus and flattening unemployment rates point to a continuation of this trend. However, the performance of those accounts still in accommodation will help shape the true consumer credit picture. With many accounts expected to come out of accommodation between March and May, most notably mortgage accounts, we will soon see the true impact of those programs for both consumers and the credit marketplace.”

While originations, measured one quarter in arrears, rocketed higher in the mortgage industry (rising 67% between Q3 2020 and Q3 2019), this performance has been an outlier in the consumer credit market. Low interest rates and greater housing demand have disproportionately propelled mortgage demand. However, originations activity for credit cards and personal loans have dropped by approximately 30% in the last year. For credit cards and personal loans, the lag in subprime borrowing has mirrored the overall market. 

Auto loans have experienced a different phenomenon in which overall originations in Q3 2020 have nearly recovered to Q3 2019 levels, though originations to subprime auto loan borrowers are lagging – down about 21%. 

“A tightening in auto lending standards would generally be the primary reason for such a precipitous drop in subprime origination activity. We’ve conducted further analysis that demonstrates that, in this case, it could be a combination of lagging consumer demand and adjustments in lending criteria,” said Satyan Merchant, senior vice president and auto line of business leader at TransUnion. “This revelation points to the outsized economic impacts some subprime borrowers are feeling as a result of COVID-19.”

Originations Activity Coming Off Early 2020 Lows

Credit performance of auto loan subprime borrowers also has deteriorated compared to similar credit risk consumers possessing credit cards, mortgages and personal loans. Whereas serious delinquency levels have risen about 22% between Q4 2019 and Q4 2020 for auto loan subprime borrowers, delinquencies have declined for the same credit risk consumers holding other credit products. 

Serious Delinquency Rates Mostly Declining, Though Subprime Auto Loan Borrowers Struggling More

*Delinquency rates are measured as 60+ days past due for auto and unsecured personal loans; 90+ days past due for credit cards and mortgages. 

For more information about the report, please register for the TransUnion Q4 2020 IIR Webinar. Additional resources for consumers looking to protect their credit during the COVID-19 pandemic can be found at transunion.com/covid-19. Read on for more for more specific insights about auto loans, credit cards, mortgages and personal loans. 

End of 2020 May Be Turning Point for the Credit Card Market

Q4 2020 IIR Credit Card Summary

Consumers with access to a credit card hit another all-time high at 187.1 million at the end of 2020, despite a second quarter of significant year-over-year (YoY) declines in originations (-34.1%). Total balances declined for the third straight quarter (-12.7% YoY), while consumer-level average balances were down for the fifth straight quarter (-9.6%).  Consumer-level delinquencies fell YoY to 1.29%, the second lowest level in five years. Serious delinquency rates are now down 89 basis points from the 10-year peak of 2.18% observed in Q4 2019. With about 2.4% of credit card accounts sill in some form of accommodation, delinquencies are expected to once more increase in the coming months as those accounts come of out of forbearance programs.

Instant Analysis

“Though credit card balances and originations continue to be well below pre-pandemic levels, we are beginning to see stabilization of balances and rising delinquency compared to the lows observed earlier in 2020. We observe many positives for consumers such as continued good news related to vaccines and improvements in the unemployment picture. Yet, some unknowns still exist. Most notably, how will those consumers still in some form of accommodation perform? We anticipate delinquency rates will rise in the coming months, but they also will be coming off of extremely low short-term levels.” – Paul Siegfried, senior vice president and credit card business leader at TransUnion.

Q4 2020 Credit Card Trends 

*Note: Originations are viewed one quarter in arrears to account for reporting lag.

Total New Mortgage Origination Loan Amounts Surpass $1 Trillion

Q4 2020 IIR Mortgage Loan Summary

Mortgage originations continued to surge in Q3 2020, reaching nearly 4 million loans — the highest level of originations since the Great Recession; and were 67% higher than last year at the same time. Originations were spread out evenly between refinancing and new purchases, with a 52% refinance share and 48% purchase share. This differs from the same time last year when 1/3 of origination activity came from refis and 2/3 from purchase. New mortgages volumes grew the most at 118% YoY for lower risk consumers (those with a VantageScore of 760+). Total new origination loan amounts reached $1.1 trillion as of Q3 2020, up 79% from Q3 2019. As mortgage origination activity increased so did median origination balances, which rose 6% on an annual basis to $255K in Q3 2020. The overall 90+ consumer level delinquency rate* dropped in Q4 2020 to 0.83%, down from 1.16% in Q4 2019. 

Instant Analysis  

“The mortgage industry continued to see strong performance as serious delinquencies remained low and balances and origination activity increased. Mortgage originations grew at a brisk pace, with much of the growth coming from lower risk consumers, and refis continuing to be a major driver of the increase in activity. While reported delinquencies are currently low, as forbearance plans start to expire at the end of Q1 and into Q2, we expect to see a rise in delinquency levels.” – Joe Mellman, senior vice president and mortgage business leader at TransUnion 

Q4 2020 Mortgage Trends 

* Delinquency rates are based on data reported to TransUnion.

** Originations are viewed one quarter in arrears to account for reporting lag. 

Personal Loan Lenders End 2020 on a Cautious Note

Q4 2020 IIR Personal Loan Summary

Unsecured personal loan lenders continue to be cautious as originations in Q3 2020 were 30.7% lower than the prior year, but grew strongly quarter-over-quarter, indicating a gradual ramp up in volume. Serious delinquency rates increased slightly by 15 basis points (bps) in Q4 2020 on a quarterly basis, though remained 78 bps lower than Q4 2019. The relatively low level of lending resulted in balances falling again in Q4 2020 to $148B, and consumers with balances totaling 19.2M – a 7.8% and 7.3% drop versus prior year, respectively. Continued availability of lender hardship programs, in addition to eviction moratoriums and decreased consumer spending, helped keep delinquencies and new charge-off balances low.

Instant Analysis 

“The recent approval of another stimulus package, and the potential for additional payments and the extension of federal unemployment benefits should help keep delinquencies and charge-offs at low levels in the near term even as lenders re-enter the market.  High savings rates and low credit card balances may continue to depress demand for debt consolidation loans, which could impact originations until lockdowns subside and consumers begin spending more. The end to lender forbearance programs, particularly mortgage, could impact delinquency rates, and later could drive more demand for credit as current liquidity sources are depleted.” – Liz Pagel, senior vice president and consumer lending business leader at TransUnion 

Q4 2020 Unsecured Personal Loan Trends 

*Note: Originations are viewed one quarter in arrears to account for reporting lag.

Auto Loan Activity Increases; Balances Rise to $1.33 Trillion

Q4 2020 IIR Auto Loan Summary

Despite a difficult economic environment, overall serious delinquency rates have not materially increased even as subprime performance has lagged other risk tiers. The borrower-level 60-day delinquency rate rose to 1.57% in Q4 2020 from 1.50% the previous year. Furthermore, balances continued to grow on a year-over-year basis, rising 3.5% to $1.33 trillion. Origination activity for Q3 improved on a quarterly basis, recovering from the trough of Q2 when COVID-19 lockdowns were most severe. Subprime borrower performance continued to deteriorate more than other credit risk tiers and the performance of this risk group will be closely monitored, especially as accounts come out of accommodation programs. 

Instant Analysis 

“The recovery observed in the auto lending market since the height of the pandemic has been a positive sign. The auto marketplace is unique in that originations activity may be more impacted by a lack of demand, whereas some of the other credit products have seen slower loan activity due to limited supply. We will likely have a better picture of what is to come in the auto lending industry as more accounts exit both auto and mortgage accommodation programs.” – Satyan Merchant, senior vice president and automotive business leader at TransUnion 

Q4 2020 Auto Loan Trends 

*Note: Originations are viewed one quarter in arrears to account for reporting lag.

For more information about the report, please register for the TransUnion Q4 2020 IIR Webinar. 

Originally posted on F&I and Showroom