The new “first time defaulter” is the takeaway from a recent survey by Deloitte.  The major points:

• Individuals who have gone through at least one serious negative credit event in the last two years for the first time in their lives.

• 22% of Americans with bank accounts experienced a serious negative credit situation during the last two years. For fully 11%, this was a new experience — the first time in their lives they fell into delinquency. [Editor's note:  22%  is a stunning number to me; 11% is not far behind in terms of shock value.]

• Unemployment and reduced income were the principal reasons why these individuals have failed to meet their credit obligations.

• Many first-time defaulters rated their interactions with lenders during their negative credit event as “poor.” This dissatisfaction may strongly encourage them to look elsewhere when borrowing in the future.

• If not for the economic recession, which has affected millions of households in America, many of the first-time defaulters might have remained in good credit standing.

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Negative credit experience during the last 2 years (1st-time defaulters)

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Credit experience segments


click for larger graphics

Category: Consumer Spending, Credit, Current Affairs, Data Analysis, Economy

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

22 Responses to “Deloitte Paints a Troubling View of Consumer Lending”

  1. BusSchDean says:

    The 22% and 11% are extraordinarily scary. Though high, the 11% of first-time defaulters can be chalked up to the “group think” re: credit that washed over the country (apologies for the mixed metaphor). Any idea why the 12% who had a previous negative credit experience more than two years ago somehow avoided it this time? Given the difficulty of changing people’s behaviors and the generosity of the credit environment I would have expected that slice of the pie to be much smaller.

  2. 22% of Americans with bank accounts experienced a serious negative credit situation during the last two years. For fully 11%, this was a new experience — the first time in their lives they fell into delinquency.

    ===========================================

    I think this was the first generation ever that was this comfortable with holding massive amounts of debt. It was a status symbol. It was inevitable that when the pullback happened the record number of debtors would default in record numbers

    I guess the number is even scarier when you think of all those people who are living debt free. That makes the percentage of debtors defaulting even higher among the debtor class. People were literally being trained to use debt as a monetary tool so this whole episode should not surprise anyone.

  3. chartist says:

    I paid off my mortgage six years ago when folks were buying houses with nothing down…I thank god for that fateful decision.

  4. @BusSchDean,

    They probably learned their lessons. Bankruptcy tends to do that. It is why bankers hate forcing bankruptcy. It tends to burn people in a way that they never want to do it again and it is often generational as kids raised in thrift tend to stick with it. Another reason could be that they were already in BK mode and thus couldn’t default because they were already under spending restraints

  5. michaelb says:

    This is too broad. Being delinquent on medical bills or late on credit card payments isn’t the same as being in default. It sounds like Deloitte has something to sell.

  6. BusSchDean says:

    @How the Common Man Sees It

    Then the current crisis worked, returning us to the approximate percentage of household to experience defaults, passing another set of households through a “teaching moment.” Actually, the lessons learned and passed on do not endure, not at the household level, not within government leaders (see Reinholt and Rogoff’s book “This Time is Different”) or corporate leaders.

  7. KJ Foehr says:

    I should have added to my comment earlier is that I would want more information on how these cost are calculated because I suspect the USA costs are overstated.

    Billings by doctors and hospitals are routinely significantly overstated in order to demonstrate that higher insurance and Medicare payments are justified. Therefore, if these health costs are based on the billings rather than amounts actually paid, then I would consider them significantly overstated.

    Also, does it include how much is spent by Americans on health related but mostly ineffective over-the-counter products? What about weight-loss snake oils, and vitamin and other nutritional supplements? If so, that adds to the overstatement, imo, because Americans probably have more disposable income to waste on such bogus product, and are probably bombarded with more such marketing campaigns intended to separate them from their money than do people in many of the other countries listed.

    What about Physical therapy? Chiropractic treatments? Acupuncture? Aromatherapy? Mental health treatment and drugs? Do people in other countries have the same access to all of these things as we do? If not, then people couldn’t spend money on them even if they wanted to. In the USA, we have it all available to spend dollars on.

    Lastly, and perhaps even more importantly, what assurance to we have that apples are being compared with apples across all the countries included? How are costs in the other countries defined, calculated and the information compiled.

    I might be wrong, perhaps “they” have perfect knowledge and data on “health care costs” around the globe, but without evidence of that I seriously doubt the underlying data is reliable or statistically valid.

  8. contrabandista13 says:

    What’s most shocking about this is in the “credit experience segments”…… The ratios of credit experiences to leverage on the banks balance sheets must be phenomenal. This must be the cause of nightmares for the Fed and the Treasury.

    And it’s not that we didn’t know this already via anecdotal evidence, however, I thought that these numbers were far less and with last Fridays NFP and with the overall employment and housing picture, the probability is, that this situation will get much worse. We are really skating on thin ice here…..

    However, I am one of those who listens to good advice when I hear it, even at my ripe old age. I remember a few years back reading in one of your posts, “The market can be wrong much longer than you can stay solvent”, or something to that effect. And I thank you for having placed so much emphasis on that statement.

    Thank you for this post, this would have surely gone unnoticed by me if you had not brought it up. It’s good tangible information.

    Best regards,

    Econolicious

  9. KJ Foehr says:

    Sorry wrong thread for comment above!

  10. BR:
    Is it really true that retail actually added 300,000 jobs last month? One of the blogs at the WSJ is claiming that, with out linking to evidence that backs up their claim. Why would the Labor Dept. do that if it’s the case? I am skeptical of their claim for a number of reasons.

  11. hammerandtong2001 says:

    Many first-time defaulters rated their interactions with lenders during their negative credit event as “poor.” This dissatisfaction may strongly encourage them to look elsewhere when borrowing in the future.

    I can speak to this from firsthand experience.

    BACKGROUND: We purchased a home in a highly exclusive and expensive NYC-metro suburb in 2005. This was a $-million + buy. The mortgage was a jumbo, and the downpayment hard cash was almost $1 million and comprised over 65% of the purchase price. The martgage was a 30 yr fixed at 6.125%. The mortgage was issued by a well-known TBTF bank — and as an inducement to do the loan, I was offered a full value HELOC for the cash equity in the house, at no cost to me for origination, and at prime on the revolver.

    1. We did not incur a negative credit event, now or ever in the past.

    2. The HELOC was drawn against for a home improvement — totalling about 6% of the available HELOC Line of credit, in 2007.

    3. We were never late with any payments, all accounts were and are current.

    4. In 2009, the TBTF bank contacted me to tell me the HELOC was frozen. I could not access any further credit. What’s more, the credit freeze was imposed retroactively. I was notified AFTER the freeze went into effect. TBTF bank explained during numerous angry phone calls that their subcontracted real-estate appraisal vendor — LPS — had re-assessed the value of my home to an estimated market value 50% less than what I paid for it 4 years earlier. And that the only way to re-activate the credit line was to have LPS do an on-site appraisal (at my cost) and the updated market value had to be equal to, or exceed, the original purchase price.

    5. The home I purchased had probably lost some degree of value. However, as indicated above, the location of this home is in an unusually exclusive area. All through the recent housing problems and travails, equally appointed homes were routinely sold at asking price and within 30-60 days of going to market. This is not an “average” real estate market. A 50% markdown from my purchase price was simply wrong. Maybe 10%, and maybe not at all. In fact, with the improvements made, it’s possible the home had actually increased in marketable value.

    6. TBTF bank would not negotiate a lower credit line, they would not pay for the appraisal they themsleves ordered. They took great pains to explain that the HELOC was NOT cancelled. They also said it was not “technically frozen” — it’s just that I could not access it. TBTF acknowledged that our credits scores were among the highest available, that they had received no late payments on our accounts, etc.

    7. Angry letters were written to the CEO at TBTF, ranking board members, and excutives along with copies to local elected officials: registered mail: return receipt requested. Letters were sent to the two US Senators representing New York State. (I did hear back from one of them, who had a ranking staff member write a letter back.) I had numerous, and very angry calls with TBTF bank representatives.

    8. TBTF would not budge, or negotiate anything.

    9. I recently (in November 2010) re-financed the mortgage on the house — got a fixed 4.65% 30 yr. And paid off the HELOC in full. The new appraisal required as part of the re-fi indicated the value of the home as greater than what I originally paid in 2005. New bank also threw in a HELOC, though half of the equity total — but it’s ACTIVE and AVAILABLE: it’s a “live” line of credit. The new bank is not a TBTF bank, and representatives of TBTF actually called me to ask if they could offer me a rate mod on the loan, instead of refinancing.

    I told them to fuck off and that I was never doing business with their bank again — ever. And I do mean it.

    .

  12. How the Common Man Sees It:
    It’s perfectly ordinary in our new upsidedown world. Wages for the working schmuck have been flat for thirty years. Outsourcing. Bad trade deals(bad for the American worker). The housing ATM took the place of real increases in wages. And now we are going to suffer because of it, unless you can show me the next bubble that will be able to act like housing did. Commodities(if it’s a bubble .. which that is debatable obviously) don’t count for obvious reasons.

  13. Bruman says:

    Great stuff, as always, Invictus. I wanted to comment on this bit:

    “22% of Americans with bank accounts experienced a serious negative credit situation during the last two years. For fully 11%, this was a new experience — the first time in their lives they fell into delinquency.”

    You found this shocking. I am also surprised, but not completely shocked. One bit of data you might not have incorporated is that the percentage of Americans with bank accounts is surprisingly low, given how most of us see them as absolutely essential. The number is not low in an absolute sense, but low in that it is a lot lower than most educated people would guess.

    I used to work in the non-profit sector, and one of the things we found was that one of the best ways to help the poor save is to get them to open a checking account. Why??? Because some surprising percentage of the poor cash checks at check-cashing services, many of which charge a fee of 5% or more to do so. So you can increase their income by around 5% just by getting them a place to deposit their money. Now that free checking is starting to disappear and new fees for debit cards are rising, that may be less helpful than before, but credit unions tend to have lower fees.

    This cnn article says that 17 million or about 10% of adults don’t have bank accounts, and another 18% use pawn services to free up money. I seem to recall that it is more than 10%, but maybe it is just that I’m remembering that way more than 10% of the poor don’t have bank accounts.

    http://money.cnn.com/2009/12/02/news/economy/fdic_survey/

  14. Mannwich says:

    @Calvin: Read this article about poverty in the UK among families that have one or both adults working and you begin to understand why this issue with “credit events’ will only likely INCREASE in the coming years. The bottom line is families are using credit for for every day purchases to survive. They then get buried in debt, interest and likely some late payment fees sprinkled in, and many will never get out of debt without simply declaring BK and starting over. There are some stunning stats here that I’m sure applies to the U.S. and other “developed” nations as well.

    http://www.independent.co.uk/news/uk/home-news/record-levels-of-poverty-among-families-with-wages-2151711.html

  15. @BusSchDean Says:

    Then the current crisis worked, returning us to the approximate percentage of household to experience defaults, passing another set of households through a “teaching moment.”

    Yeah, sure, it worked. ‘ceptin’ for all the lives ruined and the occasional murder suicide of the people and families that found the end of their rope, it worked like a charm. I think if you had asked those households how they would have liked their education served to them, they probably would have preferred not to be taken through the meat grinder. The numbers don’t always pick up the intangibles of the human tolls

  16. Mannwich says:

    Exactly, Common. How easily do we forget the actual human toll on just about everything these days. We have dehumanized everything in the transformation from people to robotic “rational” (my ass) “consumers”.

  17. Jim67545 says:

    A year or so I posted here that damaged credit would be a damper on the economy as a byproduct of the current housing and recession situation which would stay with us for 5+ years. The process of modifying mortgages, subsequently redefaulting and lenders taking 12 + months to foreclose only extends this. Look at the number of BKs/yr.

    One person above noted that 10% of the population does not have a deposit account. I would wager that since this is the lowest income segment of our population that deliquency there would be higher.

    Just one anecdote, the indirect auto loan department of a bank I worked for approved about a third of the applications it received from auto dealers. Of course, there are more reasons than credit to decline an auto loan (too high LTV, limited time on the job, as examples) but credit history was by far the greatest reason. There are also dynamics here such as loan pricing and dealer relationships which can skew the approval ratio but perhaps this gives a better picture of this serious situation.

    Those with poor credit are thrown into expensive sub-prime situations or have to settle for poor quality much older vehicles (with higher operating costs.) This is one of the little appreciated ingredients in the stagnation or decline in living standards for many of the lower income families.

  18. ashpelham2 says:

    Jim67545: It’s funny that you mention auto credit. I worked on the credit side of a major southeastern bank during the height of the boom, from late 2004 until mid 2006. On the auto lending side. I first worked through the dealers themselves to secure lines of credit for the floorplans themselves, then moved on to reviewing the relationship on down the line, as months went by. Then, I’d visit the dealers to push for more deals sent to us rather than the captive or another lender, and finally, I’d review our loans outstanding to individuals and their performance. Truly an all encompassing job in credit approval and review. In the southeast, our bank leaned toward a more conservative approach than the big money center banks, which were approving up to 150% LTV on some new car loans. Insanity!! Our bank stopped at about 125%, and the dealers were complaining that we didn’t work with borrowers enough. My bank actually suffered some bad loans later on, higher than the US average, even with our stricter lending. I can only imagine what the situation must be at the big boys banks.

    Now I work for a smaller Southeastern bank. Still, the lending woes are there, but on a much smaller scale.

    At first, I thought that the similarities were because of the lending geography (Alabama, Mississippi, Tennessee, Louisiana-4 of the poorest places in North America). Now, it looks like the overhang from loose lending standards is getting worse, and will take longer to solve.

  19. llee611838 says:

    I find this sentence most interesting: “This dissatisfaction may strongly encourage them to look elsewhere when borrowing in the future.”

    I am taken with how often we both chide the American public for too much borrowing and also operate under the assumption that borrowing is inevitable. We can’t seem to get out of the borrowing mindset.

    There are, no doubt, some consumers (citizens) who, like the people who survived the Great Depression, have come to abhor borrowing all together and who wish to eliminate their debt and never borrow again.

  20. ashpelham2 says:

    Count me in that list. It honestly hurt my feelings to even have to sign off on my house refinance a couple weeks ago, but I didn’t have the $$$$ to pay the whole mortgage off at once. But it did lower my rate to 4% rather than 6%.

    I’ve bragged about my refinance on here a couple of times, so I’m sure people are sick of seeing it! What can I say? 2010 was pretty dull for me otherwise. Biggest news all year for my household!