- We estimate a county-level household delinquency model and use it to perform “stress tests” of household debt under various economic scenarios, including CCAR scenarios for unemployment and house prices.
- Our estimated model indicates that delinquency rates respond more strongly to changes in house prices and unemployment when debt-to-income ratios are higher and when more debt is held by borrowers with low credit ratings, and also when house price shocks are associated with unemployment shocks (consistent with the “twin trigger” view of mortgage default).
- Although in Q4 2017 household debt exceeded the levels seen just before the financial crisis, our analysis suggests that the stock of debt in Q4 2017 is somewhat less vulnerable to shocks than before the crisis.
- We attribute the decline in expected default rates in times of crisis to an improvement in debt ratios and an increase in the share of debt held by borrowers with relatively high credit ratings.
We estimate a county-level household delinquency model and use it to perform “stress tests” of household debt. Applying the shocks to house prices and the unemployment rate from the Comprehensive Capital Analysis Review stress tests, we find that the projected default rates for outstanding debt in the fourth quarter of 2017 are moderately lower than those of the debt stock before the 2007-2009 financial crisis, taking into account the same set of shocks. We attribute the decline in expected default rates in times of crisis to an improvement in debt ratios and an increase in the share of debt held by borrowers with relatively high credit ratings. We also consider several alternative scenarios, including one in which the magnitude of house price shocks depends on current house valuations. In this scenario, we expect a much lower delinquency rate than during the crisis, as home valuation metrics were much more benign in 2017 than they were pre-crisis.
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