Debt & Credit Trends

Borrowers Skipping Payments on Home Loans More Often Than Other Debt

During the last crisis, consumers prioritized auto, credit cards over mortgages

New market research from Fitch Ratings recognizes that in a low interest environment, deferring mortgage payments is very cheap for the borrower even if interest is capitalized

New York/Frankfurt — Residential mortgage borrowers are missing more payments and taking advantage of payment holiday programs at a higher rate than comparable-credit borrowers of auto loans and credit cards, says Fitch Ratings. The divergence in behavior reflects a greater focus in many countries by policymakers and servicers on payment relief programs for home loans, and an economical decision by stressed borrowers to skip larger payment mortgages in favor of smaller payment consumer debt.

Whether the recent behavior is temporary will become clearer as the initial payment holiday periods expire in the coming months. During the last global crisis, many US consumers prioritized auto and credit card payments over mortgage payments, resulting in higher delinquencies for home loans than for consumer debt. A similar pattern has emerged in this crisis in the US with borrowers opting to defer mortgage payments using a forbearance program and stay current on other debts, as evidenced by prime mortgage delinquencies increasing more than prime auto loan delinquencies.

Consumers Push For Loan Modifications

A number of factors, including the large payment size relative to income, are likely to move mortgage payments down in priority, at least temporarily, for struggling borrowers. Given the very low interest environment, deferring mortgage payments is very cheap for the borrower even if interest is capitalized. To avoid negative credit history, many stressed borrowers are likely to push for loan modifications instead of stopping payments. These modifications may also be in the lender’s best interest to avoid large nonperforming loan books and increasing stock of distressed sales, if the borrower has the financial means to make future payments.

In non-US jurisdictions, mortgage borrowers have also been more likely to take advantage of payment holidays than consumer loan borrowers. All major economies have encouraged or mandated commercial lenders to offer temporary mortgage holidays as part of wider coronavirus policy responses, although many forbearance measures along with additional unemployment support are scheduled to be reduced or end in the coming three months, as discussed in our recent report Structured Finance’s Forbearance Challenges Go Beyond Liquidity. Foreclosures have been suspended in many jurisdictions and are expected to remain low through the economic recovery. This delays the risk of losing a home even if mortgage payments are not made.

Access To Liquidity Key

Given the very low interest environment, deferring mortgage payments is very cheap for the borrower even if interest is capitalized...

The more immediate risk of losing the item or utility of consumer products relative to mortgages if payments are missed is a factor that stressed borrowers will likely consider if faced with the need to prioritize debt payments. Access to liquidity is a key consideration for many borrowers and will support credit card payments, even if these are reduced to the minimum payment amounts. Considering economic recovery and job market uncertainty, consumers are spending less but want to maintain credit lines should they need to fund essentials using debt. Utilities, such as cell phone contracts, are even more essential during lockdowns and working from home. Cell phone payments are expected to rank high given the low payment amount and the ability of the service provider to stop service for nonpayment.

Similarly, consumers prioritize car loan payments due to the relative payment size and the increased importance of personal mobility due to the social distancing challenges with public transportation. Vehicle repossession for missed payments is relatively easy in most jurisdictions, although some regions have halted repossessions. Borrowers with lower relative incomes before the coronavirus outbreak are more likely to work in professions which cannot be carried out from home, underscoring the importance of access to personal transportation, especially in regions with weak public transport options.

Borrowers must weigh when the threat to their credit profiles or of repossession becomes too great compared with maintaining adequate liquidity. In many jurisdictions there is no associated credit bureau reporting for forbearance measures, although banks may consider payment holidays in their credit decisions.

 

 

The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.