Risk is rising at an accelerated pace for prime and super-prime borrowers for all product sectors that include mortgage loans, bankcards and auto loans, according to findings from a study by VantageScore.
The study found that payment behavior is changing. For instance, borrowers who have at least one delinquent trade, the priority for paying a mortgage has shifted.
According to VantageScore, there was a 14% drop in mortgages remaining current over the past three years. This is reflected in the fact that there were less borrowers who maintained clean mortgage payment behavior in June 2009 compared with those who stayed current with their mortgage payments in December 2006 — even though they had delinquencies in thier credit file in terms of other trade lines.
At the same, risk levels have recently leveled off for subprime borowers in terms of their mortgage loans, However, the story is not the same for all the other industries such as bankcards and auto loans, where risk at the subprime level still saw an increase, the VantageScore study found.
For auto loans, for instance, VantageScore found that in the period from June 2007 to June 2009, there was a large jump in risk at all score bands that include super-prime, compared with the previous four periods.
The periods were broken down as follows: June 2003 to June 2005, June 2004 to June 2006, June 2005 to June 2007, June 2006 to June 2008 and June 2007 to June 2009.
Even though subprime scores experienced an improvement in the second time period or from June 2004 to June 2006, increases happened in each subsequent timeframe at this credit quality level.
VantageScore said that lenders that used a 1% default strategy in 2003 would have set a cutoff of 750 VantageScore.
However, as a result of the changing trends in consumer behavior toward their loans, in 2009 the same score cutoff would have resulted in a 2.5% default scenario.
This is why, according to VantageScore, for these lenders to maintain a 1% default strategy, they would need to move the cutoff to an 850 VantageScore, with the full VantageScore scale being 501-990.
At this juncture, according to VantageScore, it is recommended that lenders monitor payment behvior trends within their own portfolios for similar changes.
The link below provides a chart demonstrating the impact to portfolio risk of consumer credit defaults in the past six years.
