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FICO survey finds delinquencies expected to rise

Credit card defaults fell to a 15-month low in July, according to Fitch Ratings. Michael Dean, a managing director at Fitch, tempered this welcome news by saying: “The trends are encouraging, but card defaults are still elevated historically and are expected to remain so. Unemployment will continue to weigh on consumer credit quality throughout the rest of this year and well into 2011.”

Indeed, there remains industry skepticism that the worst is not yet over. A new FICO survey reveals that bankers’ outlook on future delinquencies remains grim.  In the survey, which we conducted in conjunction with PRMIA, bank risk professionals told us that they expect delinquencies to increase in Q3-Q4 for most types of loans.  This includes mortgages (53% of respondents expected a rise in delinquencies while only 14% expected a decrease), credit cards (42% expected an increase), small business loans (47% expected an increase) and student loans (49% expected an increase).

One of the more unexpected findings was that bankers responsible for auto loans and credit cards had a particularly negative outlook for their own sectors.  Among bankers who manage auto loans, 96% expect delinquencies on auto loans to increase or remain the same.  Less than 4% expect delinquencies to drop.  And among bankers who manage credit cards, nearly 85% expect delinquencies on credit cards to increase or remain the same, while roughly 15% expect delinquencies to drop.

We also asked survey respondents about their overall expectations for new delinquencies (i.e., accounts that become 30-days late) and charge-offs (i.e., older delinquencies that are written off).  Respondents felt both categories of delinquencies were going to rise, and the sentiment was similar in strength for both categories, which suggests the pipeline of delinquencies isn’t going to shrink in the near future.

If there is any silver lining to this survey it’s that the results were less negative than what we found in the same survey taken in the second quarter.  For example, while 53% of all respondents in the third quarter expected mortgage delinquencies to rise, the figure was 60% in the second quarter.  Likewise, the percentage of all respondents expecting an increase in credit card delinquencies fell from 59% to 42%.  And, the percentage of all respondents expecting an increase in delinquencies on auto loans fell from 41% to 30%.

For more details, read the report of survey results.

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