Housing, Credit Face a Long Recovery

CUNA's Escan
January 25, 2012 | COMMENTS

Risk-management professionals hold a decidedly pessimistic outlook on the housing market and consumer credit, according to a survey conducted for analytics firm FICO by the non-profit Professional Risk Managers’ International Association (PRMIA).

The survey, reversing the growing optimism seen in late 2010 and early 2011, shows that risk professionals expect delinquencies on consumer loans to rise, underwriting standards to become stricter, and the housing sector to continue struggling far into the future.

Key findings and predictions about the next six months:

* Most (85%) believe the level of mortgage delinquencies will rise or stay the same.
* Nearly half (49%) expect auto loan delinquencies to stay the same.
* Many respondents (48%) think the U.S. is heading for a double-dip recession.

Housing sluggish until 2020

When asked if housing prices nationally would climb back to 2007 levels before the year 2020, 49% of respondents said no, only 21% said yes. And the negative sentiment extended beyond property values. Among those surveyed, 73% believe mortgage defaults would remain elevated for at least five more years. 

“Housing has been an enormous drag on the economy for over three years as U.S. households lost trillions of dollars in equity,” says Andrew Jennings, chief analytics officer at FICO and head of FICO Labs. 

“While the housing sector will almost certainly gain strength during the next nine years, many professionals believe prices will remain depressed for half a generation,” adds Jennings. “This puts the devastation of the housing crash into perspective.”

Credit health seen declining

Survey respondents expressed concern about consumer credit health beyond mortgages. 

When asked their opinions about the next six months, a large number of survey respondents indicated that they expect delinquencies to rise on auto loans, credit cards, and student loans:

Auto lending, previously a bright spot in FICO’s quarterly surveys, has a mixed outlook, with 30% of respondents expecting auto delinquencies to rise, while 21% expect them to fall. 
*For credit cards, 40% expect delinquencies to rise and 23% expect them to fall. 
*And for student loans, 48% of respondents expect delinquencies to rise and 13% expect them to fall.

About 36% of respondents expect delinquencies on small business loans to increase; 17% expect delinquencies to decrease. 
* While 57% of those surveyed expect the amount of credit requested by small businesses to increase over the next six months, only 34% expect the amount of credit actually extended to small business to increase. This credit gap between supply and demand has been persistent over the past six quarters.

Card use could rise slowly

About 50% of survey respondents expect credit card balances to increase over the next six months. The increases are likely to be driven by higher spending among some consumers and smaller monthly payments from others. 

But not everyone is optimistic about credit card growth. In a sign that risk managers aren’t optimistic about the ability of consumers to power the economic recovery, 64% of respondents expect credit card usage to remain below pre-recession levels for at least five more years.