The Federal Open Market Committee began its September meeting yesterday, and later this afternoon we will hear the results. Will there be a rate hike in September, or will the Fed continue to postpone it? We’ll find out later today.
In a guest blog for HousingWire, Ted Jones, Stewart Title Guaranty Company chief economist and senior vice president, tackles the question as the whether or not the Fed will raise interest rates, and if so, by how much.
For now, however, TransUnion’s new study shows that if the Fed does raise interest rates, it could cause a payment shock for over 9 million consumers. And, that's not just for homeowners, but a wide swath of borrowers.
A total of 92 million credit-active consumers would experience some kind of payment increase if the rates go up by 25 basis points, however the average increase would be only $6.45 per month.
About 9.3 million, however, will not be able to absorb the increase in monthly payments that would follow a rate hike.
TransUnion’s study found that about 68% of credit-active consumers would experience some level of payment shock, or change in monthly payments, if interest rates increase.
“While it’s important to address the 9.3 million consumers who cannot absorb the payment shock, 90% of exposed consumers can afford their increased monthly payments,” said Nidhi Verma, TransUnion senior director of research and consulting. “However, if interest rates continue to rise progressively, more consumers might not be able to absorb the payment shock.”
Those who are at risk for payment shock include consumers who have one or more variable-rate credit products such as a credit card, home equity line of credit or certain forms of mortgages and personal loans.
In order to see if consumers could afford an increased monthly payment of any size, TransUnion studied historical payment behavior. The company used its CreditVision aggregate excess payment algorithm, which incorporates monthly payments from mortgages, credit cards, student loans and other debt obligations, to determine a consumer’s capacity to afford an increased monthly payment.
“Ahead of a potential rate hike from the Federal Reserve, there is much speculation about the impact to consumers, and their lenders, from increased monthly payments,” Verma said. “In theory, 137 million consumers could be exposed to a payment shock, but in fact not all of these consumers will be impacted.”
Verma added that some consumers are transactors, and for example, they pay their balances in full each month. In other cases, the APR that cannot be further increased.
While the "millions" number may seem fairly large, in reality the impact is expected to be muted across the credit markets, assume any Fed hike will be by only 25 basis points.
“Fortunately, we believe it is highly unlikely the Fed will raise rates more than 25 basis points at any one time over the near term,” said TransUnion's Verma. “This pace gives potentially impacted consumers an opportunity to adjust.”
“In many cases, making minor changes to household spending would allow consumers to accommodate the payment shock,” she said.