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Have Delinquency Trends Changed Due to Stock Market Growth?

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Do delinquency trends change because of stock market growth? It’s a good question. Both the movement of the stock market and delinquency trends are affected by the overall economy. But just because they have similar influences, it does not mean there is a causal correlation between stock market changes — either up or down — and delinquency trends.

Moreover, delinquency trends can change due to factors that have nothing to do with the stock market, such as underwriting standards and natural disasters.

A Closer Look at Economic Factors

Stock markets rise and fall due to multiple economic factors, including corporate profits, gross domestic product (GDP) results, and employment statistics. They can also rise and fall based on expectations.

This year, for example, the Standard & Poor 500, a proxy for the broader market, has risen more than 13% year to date. That’s a very robust climb, and it’s based on a stronger economy, a good employment picture, and expectations that the policies of President Donald J. Trump will be positive for business. (The rise started shortly after his November 2016 election.)

Delinquency trends, of course, reflect the overall economic picture but tend to reflect the employment picture and housing prices rather than the direction of the stock market. Consumers who have lost their jobs, for example, may default on credit cards, mortgages, or both, simply because they no longer have money coming in to make their loan payments.

Now, job loss might, of course, happen concurrently with drops in economic factors that affect the stock market, such as GDP and corporate profits. A company whose sales and profits are falling may reduce its workforce. But the correlation is more between profits, job loss, and delinquencies rather than the stock market and delinquencies.

Might consumers in some situations cash in their stocks to make loan payments rather than fall into delinquency? Yes, it’s certainly possible. But consumers whose economic situation is causing them to become delinquent and who have money in the stock market have several economic options. They may also choose to use the money for other purchases. Or, they may elect to keep money in the stock market rather than cashing it in.

Finally, of course, consumers with little disposable income are likely at the most risk for delinquency, and they may not have money in the stock market to begin with.

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Underwriting Standards Are Driving Credit Card Delinquencies Higher

The role of factors other than economic ones is starkly clear in recent trends for credit card delinquencies. They rose recently at several major lenders. At JPMorgan, for example, delinquencies rose 1.22% in September. At Discover, credit card delinquencies rose by 1.64% during the same month, and Bank of America saw a 1.56% climb — the second time the latter has seen rising delinquencies in the last three months.

Yet the reason for the rise in delinquencies is that these lenders have increasingly gone after subprime borrowers to grow their credit card business in recent years. Subprime borrowers are more likely to default on their loans.

Mortgage Delinquency Rates Are Ticking Down, but Hurricanes Taking Some Toll

Overall, mortgage delinquency rates are ticking down. Early this year, delinquent mortgages constituted 4.4% of the total versus 5.2% last year. The rate is the lowest in 10 years.

In some areas with strong economics and employment, the rate is even lower.

In the San Francisco Bay area, for example, only 1.8% were early stage delinquent (at least 30 days), a drop from the 2.1% recorded the previous year. Home loans delinquent by at least 90 days were just 0.6% versus 0.9% a year earlier.

Slightly south, in Silicon Valley, just 1.4% of mortgages were early stage delinquent, versus 1.7% the prior year. Just 0.5%, very low, were seriously delinquent versus 0.7% a year prior.

These numbers are much lower than the figures registered during the financial crisis of 2008 when 50% of the homes sold were in foreclosure.

Yet natural disasters have also driven some increases in delinquencies in affected areas. SunTrust Bank, for example, reported an increase in delinquencies of 5 basis points in its most recent quarter over the previous quarter, and 4 basis points year over year, largely because of disruptions related to hurricanes in Florida and Texas.

Loan Portfolios Need to Be Optimized

Delinquencies are affected by many factors and decisions. Lenders must plan to ensure that their loan portfolios remain strong. They are well-advised to join experienced partners to decide on loan sales and acquisitions that will ensure strong results for their portfolios.