NEW YORK (MainStreet) National default rates dropped in all areas except bank cards where patterns saw an up tick, according to new data.
"Default rates are continuing a downward trend," said David M. Blitzer, managing director and chairman of the Index Committee for the S&P 500 Dow Jones Indices.
Chicago, Los Angeles, New York and Miami remain below default rates they posted a year ago, according to the S&P/Experian Consumer Credit Default Indices.
"Default rates are significant because they can be used to predict how lenders are going to adjust their underwriting criteria in the short term," said John Ulzheimer, consumer credit expert with CreditSesame.com. "If default rates go up then lenders tend to tighten up approval requirements, which means fewer people are going to have access to mainstream and competitively priced credit."
Miami had the highest default rate at 2.74% while Los Angeles saw the lowest at 1.07%.
"There are a variety of external influences that drive regional differences," Ulzheimer told MainStreet. "Certainly the unemployment and underemployment rate is a factor. The cost of living is also a factor as the demand for your dollar is always a factor in default rates."
The first mortgage default rate dropped to 1.27% compared to 1.12% for auto loan defaults.
"When default ratios are high, it trickles down to tougher underwriting guidelines for all U.S. banks," said Kathryn Blaze, real estate agent with Fenwick Keats in New York. "Default ratios can be improved with a higher down payment when purchasing a home. A few years ago someone could purchase a home with almost no money down."
When mortgage applications are declined, it is typically a result of tougher and tighter underwriting guidelines trickling down from past audits on defaulted mortgages.
"When you have very little skin in the game, it makes it easier for someone to walk away from a home as opposed to someone who put 20% to 30% down and will sell the home before allowing a bank to foreclose on it," Blaze told MainStreet.
Bank card defaults increased to 2.98%.
"That's bad news but not terminally bad," said Ulzheimer. "Default rates tend to fall between 1% and 5% depending on the card issuer. Going deeper into the credit score pool means more fee and interest income and ultimately higher default rates."
As for improving bank card default rates, increasing minimum credit score requirements for new customers or re-issuing cards could eliminate defaults.
"But that's not a good idea because you forgo a tremendous amount of revenue by having too clean of a card portfolio," Ulzheimer said. "Credit card issuers are perfectly content with default rates in the 1% to 5% range as long as they're still profitable among the lower scoring ends of their portfolio. That's one reason you'll see the default rate move over time because credit card issuers change their credit score requirements to either allow more riskier customers on the books or keep them off the books."
--Written by Juliette Fairley for MainStreet