The default rates for both first and second mortgages rose from July to August, marking the second time in three months the rates have increased since hitting historical lows in May, according to S&P Dow Jones Indices and S&P/Experian Consumer Credit Default Indices for August 2015 released Tuesday.
The first mortgage default rate for August was 0.84 percent, up four basis points from July. This default rate fell to a historic low of 0.74 percent in May, then jumped by six basis points in June and held steady in July. The second mortgage default rate climbed by two basis points in August up to 0.57 percent; this rate, too, had fallen to a historic low in May (0.42 percent), then climbed 13 basis points in June before holding at 0.55 percent in July.
The composite default rate, which includes first and second mortgage defaults as well as defaults on bank cards and auto loans, rose by four basis points up to 0.96 percent in August. This was also the second increase in three months for the composite default rate, which rose by five basis points in June and ticked down by one basis point in July after falling to a historic low of 0.88 percent in May. The S&P/Experian Consumer Credit Default Indices were launched in May 2010.
"The ongoing improvement in the consumer economy is reflected in consumer credit default rates."
The only one of the indices within the composite that declined from July to August was the bank card default index, fell by eight basis points to 2.71 percent.
"The ongoing improvement in the consumer economy is reflected in consumer credit default rates," said David M. Blitzer, Managing Director and Chairman of the Index Committee at S&P Dow Jones Indices. "In recent months, we have seen substantial job growth, increases in consumer spending, and a rise in consumer credit outstanding. Despite continued weak wage growth, consumer credit default rates remain in a narrow range at low pre-financial crisis levels. Two economic areas showing strength are auto sales and housing. Car and light truck sales saw recent gains reaching an annual rate of about 17.5 million units as sales of new homes and housing starts picked up. To reflect that the growth in credit is largely due to loosening of credit standards indicating banks are willing to bear increased risk by approving more subprime consumers—which will lead the higher default rates."
Analysts are currently anticipating the impact of a potential federal funds target rate increase by the Federal Reserve later this week. The Federal Open Market Committee will announce their decision on Thursday.
"Presumably, the Fed will raise interest rates, the question is whether it will be now, late this year, or sometime in the first half of 2016. Little initial impact is expected on consumer use of credit or on default rates," Blitzer said. "A quarter-point increase in the Fed funds rate will not affect fixed rate mortgage loans or auto financing. Some small increases in interest rates on bank cards and similar lending may occur in the months following Fed action. Adjustable rate mortgages tied to market rates will rise as mortgage loans reach dates when rates reset. Barring a pattern of rapid sustained interest rate increases from the Fed—which no one foresees—the near-term impact on consumer defaults will be very small. Immediate results of a Fed move will be seen in the stock and financial markets."