The default rate for first mortgages increased four basis points in August to reach 0.84% of all mortgages in the U.S. – up slightly from July, according to the S&P/Experian Consumer Credit Default index, a comprehensive measure of changes in consumer credit defaults.
Meanwhile, the default rate for auto loans increased four basis points to reach 0.90%, and the default rate for credit cards saw a slight decrease to reach 2.71%, down eight basis points from the previous month, according to the index.
The composite rate in August was 0.96%, up four basis points from July.
The report notes that despite weak wage growth, consumer credit default rates are currently close to pre-financial crisis levels.
‘Two economic areas showing strength are auto sales and housing,’ says David M. Blitzer, managing director and chairman of the index committee at S&P Dow Jones Indices, in a statement. ‘Car and light truck sales saw recent gains reaching an annual rate of about 17.5 million units as sales of new homes and housing starts picked up.’
Blitzer adds that the growth in credit is ‘largely due to loosening of credit standards, indicating banks are willing to bear increased risk by approving more subprime consumers.’ He warns, however, that looser credit could result in higher default rates in the months to come.
Four of the five major cities saw their default rates increase in August, according to the report. New York saw the largest increase, reporting 1.04%, up 12 basis points from July. Dallas saw its default rate increase by seven basis points to 0.71%. Chicago reported its third consecutive increase with a 1.21% rate, up six basis points from the previous month. Miami reported a default rate of 1.46%, up one basis point for the month.
Los Angeles was down 13 basis points to 0.76% – the only city to report a decrease in August.
‘With the Federal Reserve policy meeting on Wednesday and Thursday this week, analysts are debating the possible impact of an interest rate increase,’ Blitzer adds. ‘Presumably, the Fed will raise interest rates – the question is whether it will be now, late this year, or sometime in the first half of 2016.
‘Little initial impact is expected on consumer use of credit or on default rates,’ Blitzer says. ‘A quarter-point increase in the Fed funds rate will not affect fixed-rate mortgage loans or auto financing. Some small increases in interest rates on bank cards and similar lending may occur in the months following Fed action. Adjustable-rate mortgages tied to market rates will rise as mortgage loans reach dates when rates reset.
‘Barring a pattern of rapid sustained interest rate increases from the Fed – which no one foresees – the near-term impact on consumer defaults will be very small,’ he adds. ‘Immediate results of a Fed move will be seen in the stock and financial markets.’