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Do Lower PLL Ratios Mean The Credit Crisis Is Over?

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On the surface, recent credit union provision for loan loss (PLL) trends seem encouraging; industry-wide through second quarter 2010, the ratio of PLL to average assets has declined by 31 basis points to an annualized ratio of 0.81%.  However, delinquencies and charge-offs as a percent of loans have only decreased by 11 basis points and 5 basis points respectively for the same period.
Of course every situation and institution is unique, but as we look toward 2011, credit unions might want to consider:

  • Is the improvement in PLL sustainable?  Or, could it be a function of allowance accounts being over-funded?  As noted above, recent delinquency and charge-off trends do not look as positive as the industry PLL trend
  • Do the unemployment outlook, real estate values and the trends in member credit scores support the assumption that PLL will continue to decrease through 2011?
  • What if many of our usually dependable borrowers lose their jobs and, at a certain point, run out of savings?
  • What if strategic defaults become more commonplace?  Consider that strategic defaults are currently blamed for as much as 25% of foreclosure activity
  • Could commercial real estate woes trickle down to further impact the economy and cause broader loan losses?

Is 2011 the year that we’ll see sustainable improvements in PLL?  Hopefully it is, but with all of the uncertainty out there, we may not want to count on it just yet.

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Which Bills Should I Pay? How Consumer Priorities are Changing

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As the present economic crisis continues to unfold, some noteworthy changes in consumer behavior have started to emerge.  One with far-reaching consequences for credit unions is the increasing tendency for consumers to forgo paying for their mortgages while choosing to pay credit card bills.  Between first quarter 2008 and third quarter 2009, the percentage of consumers who were current on their credit cards while delinquent on their mortgages rose from 4.3% to 6.6%.  During the same time period, those who were current on their mortgages while behind on their credit cards dropped from 4.1% to 3.6%.  (Forget the Mortgage, I’m Paying my Credit Card Bill, usnews.com, 2/8/2010)

A variety of reasons are driving this behavior including the fact that it takes much longer to foreclose on a home than it does to shut down a credit card.  Unemployed consumers may need the credit card more acutely since it can pay for daily necessities while the home foreclosure is months down the road.

Although unemployment is the major cause of mortgage defaults, strategic defaults – where consumers who can afford their payments choose to walk away for financial reasons – may be driving some of this behavior change, too.  Brent White, a University of Arizona law professor, makes a thorough argument in favor of choosing strategic default.  Setting aside the complicated moral questions, if more voices like his are heard, could this become the new socially acceptable norm?

What does it mean in terms of projections for loan losses and new loan volumes?  How will underwriting standards change going forward?  Will a consumer who suffered long-term unemployment and lost a home be given a “pass?”  What about one who chose a strategic default?  It is important to consider these shifts in consumer behavior when doing financial and strategic planning recognizing the good, the bad and the ugly emerging trends.

(White, Brent T., Underwater and Not Walking Away: Shame, Fear and the Social Management of the Housing Crisis, Updated February 2010)