Default rates of marketplace consumer loans held in ABS pools declined year-over-year in March, one of the clearest signs yet of a full post-COVID recovery for the nascent sector.
But that normalization could be shortlived, given the boost that soon-to-expire government stimulus programs have buoyed consumers’ ability to repay, according to Fitch Ratings.
Fitch reported Monday that it believes defaults and delinquency rates of secured and unsecured marketplace loans could again be on the rise in the second half of 2021 as government support for unemployment benefits and stimulus checks winds down.
“Delinquencies and defaults began to normalize” in the second half of 2020, and improved further with “additional stimulus measures in late 2020 and 1Q21” helped borrowers maintain payments and graduate out of active payment deferral programs.
However, a “resurgence of delinquencies and default rates is possible [in the second half of 2021] as government support again winds down.
Continued economic growth and job gains could mitigate the loss of stimulus to borrowers’ income, but Fitch believes that the low-payment priority consumers place on MPLs compared to mortgage and auto loans may yet rear itself in the sector. “As payment holidays end, borrowers may be forced to selectively pay some loans over others, especially those borrowers who are subprime or near-prime or have lower incomes.”
The expectation comes as marketplace lending ABS performance continues to improve, even over pre-pandemic levels in March 2019 when Fitch’s constant default rate index was 9.34%, compared to 7.09% in March 2021. Delinquencies were also down YOY as well from March 2019.
