Hierarchy of Payments Fluid, Credit Bureau Says
Payment data analysis by TransUnion, a national credit reporting bureau, demonstrates consumers’ shift in loan payment habits, making auto loans the first major bill that gets paid each month.
The bureau drew its conclusion after noticing a continuing drop in auto loan delinquencies and conducting further examination of its data.
For only the third time in the last 10 years the U.S. did not experience a rise in auto loan delinquency.
“Normally, there is a seasonal upswing in auto delinquency rates in the fourth quarter. Except in 2009 where there was no change and in 2003 where there was about a 4% drop, auto delinquency rates have shown upward movements between third and fourth quarters averaging in excess of 5%,” said Peter Turek, automotive vice president in TransUnion’s financial services business unit. “Ending the year flat is particularly interesting, since the number of new auto loans coming onto the books has consistently increased since the end of the recession, a primary driver of which has been an expansion in lending to consumers in the subprime market.”
Between the third and fourth quarters of 2011, about half of the states experienced increases in their auto delinquency rates, TransUnion reported. On a more granular level, 44% of metropolitan statistical areas saw increases in their delinquency rates last quarter. In comparison, 54% of MSAs experienced a rise in auto delinquency rates during the third quarter of 2011 and 40% did so in the second quarter of 2011.
Further analysis of payment data drew the conclusion that consumers are adjusting their behavior to reflect shifting economic realities, according to Ezra Becker, vice president of research and consulting for financial institutions at TransUnion.
“For the longest time, prior to about 2006, 2007 and 2008, the consumer hierarchy of payments had the mortgage at the top, meaning it was paid first, and the credit card at the bottom, meaning it was paid last,” Becker said. “Or, at times of economic challenge and difficulty, in any given month the credit card was the first bill to be deliberately left unpaid in favor of something else. Now that has gradually changed in a couple of different ways,” he added.
The first shift was a marked jump of the credit card in the hierarchy of payments, moving from the bottom of the list where it had been for years to the top. Becker attributed this shift to a number of different factors, including the perceptions among consumers that their houses were no longer necessarily steadily increasing assets even if they were not underwater on their mortgages. There was also an additional perception that having a valid and available credit card had become a very important part of maintaining liquidity, he argued.
“Prior to the recession, credits cards were often seen as something of a commodity,” Becker explained, “with credit terms relatively easy to meet and new offers coming almost every month, consumers felt less tied to any individual card.”
Now Becker said auto loans have bumped credit cards out of the top spot and he attributed this shift to another central economic reality. “The key aspect of this recession has been marked unemployment and in particular long-term unemployment,” he said. “The continuing very long time to find another job has meant that consumers have come to see their cars differently, not just as essential for getting to an existing job but even more essential for finding another job if they have to do that.”
Becker added that “consumers have in their back of their mind that, if they had to, they could live in their cars. They know they can't drive their homes to work.”
The TransUnion analysis looked at four million consumers in each quarter of 2011 that had at least one auto loan, one bank card and one mortgage. Of the consumers who were delinquent on any of these products 9.5% were delinquent on an auto loan while current on their credit cards and mortgages; 17.3% were delinquent on a credit card while current on the other two and 39.1% were delinquent on a mortgage but current on the others.
Becker also noted the varied repercussions for missing payments. If a consumer missed payments on a credit card, they would rapidly lose their card, take a hit to their credit score and likely eventually face collection pressure, but if a consumer misses the same number of payments on an auto loan, he or she will likely lose the car, Becker explained.
Both impacts were perceived to be greater than the impacts consumers would face from falling behind on mortgage payments. In states where foreclosures are processed without oversight from a court, it can take 300 days for foreclosure. In states where there is judicial oversight over the foreclosure process, it can take more than 600 days, he observed.
As the economy, employment and real estate values improve, Becker said, there is no reason to suppose that consumers' payment hierarchy will shift again toward a more familiar model.