U.S. debt purchasers are positioned to benefit from rising delinquencies due to improvement in portfolio supply from an increase in non-performing loan (NPL) sales, according to a recent report from Fitch Ratings.
This increase in delinquencies is attributed as a byproduct of mounting recessionary pressures, with higher interest rates and inflation raising the risk of portfolio write-downs, which the firm says reinforces the importance of strong capitalization, pricing discipline and cost efficiency for debt purchasers.
According to the New York Fed, total U.S. household debt rose 2% sequentially in the second quarter of 2022, or $312 billion, to $16 trillion. The report says this rise in debt was primarily collected on charge-off credit card receivables, with U.S. credit card balances also growing 2% ($46 billion) in the second quarter.
At the same time it states that early-stage delinquencies, which rose quickly during the second half of 2021, remain beneath pre-pandemic levels and have normalized due to rising interest rates. Fitch says this has increased consumer leverage and raised debt servicing costs on variable-rate card receivables, stating this equates to lower cash flows due to a tail-off in government stimulus benefits.
While consumer liquidity improved in 2020 and the first half of 2021, due to widespread government benefits and a decrease in spending opportunities (pandemic, supply chain issues), Fitch says that collections declined 16% year-over-year on average in the first half of 2022. It says this was driven by normalizing collection rates and lower portfolio purchases, and says that consumers in collection accounts are “already showing some distress and could be less affected by rising cost of living pressures.”
Despite this, the report notes that higher inflation and macroeconomic deterioration can negatively affect collections and in-turn lead to portfolio impairments. While leverage has fallen to the low end of target ranges since the pandemic, due to a lack of portfolio purchases, the report notes that even if unsecured markets were to remain closed in the near term, rated issuers have ample liquidity headroom from secured facilities to support portfolio acquisitions.
Due to these variables, the report says that rising 30-day delinquencies on higher outstanding balances should translate to higher charge-offs in six to nine months. The report says this could reverse the declining estimated remaining collections (ERC) trends that have been seen in the past few years due to reduced NPL supply.
Fitch also claims that normalizing losses and higher loan growth will provide greater portfolio NPL supply, with purchasing opportunities expected to continue to improve as sales of NPLs resume.
In terms of mortgage risk, the forbearance rate in September decreased three basis points from the previous month to 0.69% of the servicers’ total portfolio volume, according to the Mortgage Bankers Association. As of Sep. 30, 345,000 homeowners were in forbearance plans, down from 360,000 at the end of August.
The MBA expects pressure on delinquencies and forbearance requests in the coming months due to the worsening economic conditions and the destruction caused by Hurricane Ian.