CHICAGO — A new TransUnion study found consumers are still
more likely to pay their auto loans ahead of their mortgages and credit cards.

But what if consumers started to waver on keeping up with
their vehicle notes and delinquencies began to rise above their current
near-low levels? One of the co-authors of the study told SubPrime Auto Finance
News about how that trend might not be such a bad thing for the health of the
vehicle financing industry.

"I think it will be reasonable to think that delinquencies
will start to go up, and that's not necessarily a bad thing," said Steve
Chaouki, co-author of the study and group vice president in TransUnion's
financial services business unit.

"Really low delinquencies can mean the market is tighter
than it could be," Chaouki continued. "As long as delinquencies are managed
well and the subprime lending that's going on and growing is done in a careful
and calculated way, then I think delinquencies can rise and it won't present a
problem."

As the U.S. economy has slowly dug itself out of recession,
consumer payment trends showed how unique the last downturn truly was. Chaouki
explained the traditional payment hierarchy placed the importance on mortgage
payments first, followed by auto loans and then credit cards.

"During the recession, auto became first, followed by cards
and then mortgages a distant third," Chaouki said.

A housing collapse analysts have rarely seen pushed
mortgages down so far, the TransUnion study showed. Meanwhile, the actual and
perceived value of used vehicles pushed the importance of keeping up with
contract payments even higher.

"What we're seeing is used-car values being relatively high
versus the past, there's a lot of value in the asset itself and people have
held onto their cars longer so you have more equity in the loan," Chaouki said.

"It's the opposite reasons why we saw mortgages losing
position and we saw auto maintaining position," he continued. "Auto is a very
valuable asset right now both in terms of getting you to work and the utility
it provides, but also in terms of the financial value of the vehicle. Cars are
worth more to people now than they were in the past. They often are above water
on them or they're closer to being above water than they had been in the past.
Therefore, they're more likely to pay.

"Given the ease of selling used cars these days, if they can't
pay they can just sell the car than just have it repossessed," Chaouki went on
to say.

According to TransUnion's Industry Insights Report released
late last month, subprime borrower vehicle debt has increased more than 7
percent in the past year. Of the total account volume for the second quarter,
TransUnion found 14.9 percent fell into subprime, the same reading the firm
spotted in the year-ago period.

Analysts mentioned how much second-quarter loan volume was
categorized as subprime going back five years:

—2008: 19.9 percent

—2009: 19.9 percent

—2010: 17.8 percent

—2011: 15.7 percent

—2012: 14.9 percent

—2013: 14.9 percent

Meanwhile, TransUnion determined second-quarter delinquency
levels for subprime borrowers remained about the same, moving from 4.94 percent
in Q2 2012 to 5.02 percent in Q2 2013.

Generally having really low delinquencies is a good thing as
a headline, but it's not really the greatest thing for the industry," Chaouki said.
"What the industry wants to have is managed delinquencies. It really doesn't
matter where they are as long as they're managed and controlled and measured.

"The housing market didn't have that," he added. "It became unmanaged.
It became very high relative to what the yields were and it got to be very bad.
Autos have never had that happen.

"Just because delinquencies go up, I would caution people to
think that's a bad or dangerous thing only if they're going up precipitously and
not managed well against the yield," Chaouki went on to say.

More Details about Payment Hierarchy Study

Turning back to the study TransUnion released last year,
analysts found more evidence that consumers in financial distress are placing
increased value on paying their mortgages ahead of their credit cards, a
reversal of the trend observed during the housing downturn.

The study also validated the strength of the correlation
between rising or declining home prices and consumer payment preferences
between mortgages and credit cards in situations of constrained liquidity.

"The results of previous TransUnion research showed that,
beginning in 2008, consumers with both a credit card and a mortgage had a
higher propensity to go delinquent on their mortgages than on their credit
cards — a reversal of traditional payment patterns," Chaouki said.

"This occurred in an economic environment marked by the build-up
and bursting of the housing bubble," he continued. "In fact, it is broadly
believed that the shift in payment preferences was largely derived from the
struggles of the housing market.

"Our latest study indicates that, for the first time since
the housing bubble, consumers with constrained liquidity are making their
mortgage payments about as much as their credit card payments, though auto loan
payments remain the top priority," Chaouki went on to say.

The TransUnion study captured the responsiveness of payment
behavior to both periods of significant home price depreciation as well as
periods of significant appreciation, with a sample window spanning from January
2008 to December 2012. The delinquency measures were based on 12-month rolling
consumer cohorts.

For example, the first cohort included all consumers in the
sample who had a mortgage, credit card and auto loan all in good standing as of
January 2008, and then measured the presence of a 30 days past due or worse
delinquency as of January 2009.

In the span of the study, TransUnion insisted the findings
clearly show the level of mortgage delinquencies have nearly reached that of
credit card delinquency among the cohorts of consumers who have all three
primary loan product types.

"With continued improvements in housing prices, it's
probable that by the end of 2013 we will see the majority of consumers paying
their mortgages ahead of their credit cards," Chaouki said.

To determine how much of an impact housing prices had on the
rate of payment of credit cards versus mortgages, TransUnion looked at the
delinquency spreads between mortgages and credit cards over the sample period
for consumers with both products, and compared that spread to the Standard and
Poor's Case-Shiller 20-city Home Price Index.

For instance, if the 30-day credit card delinquency rate was
1.25 percent and the 30-day mortgage delinquency rate was 1.75 percent for a
given year, then there would be a 0.50 percent spread between the two
variables.

"Looking at the delinquency spread in comparison to
housing prices, we observed an interesting pattern with three phases: rapid
increase, stabilization, and rapid decrease," said Ezra Becker, co-author of
the study and vice president research and consulting at TransUnion.

"These three phases of delinquency behavior appear to be
primarily driven by the evolution of home prices," Becker continued.

The study found variances for the major markets impacted by
the housing bubble.

For instance, Los Angeles, Chicago and Dallas experienced
the housing crisis quite differently. These differences in the trend of home
prices resulted in distinct payment hierarchy experiences across the three
geographies.

While the delinquency spread between mortgage and credit cards
for the United States peaked at just over 1 percent, markets hit hard by the
mortgage crisis had much higher spreads.

In the case of Los Angeles, which experienced significant
home value depreciation followed by a period of stable prices and a recent
period of home price appreciation, the delinquency spread between mortgages and
credit cards peaked early on at above 4 percent. However, the spread declined
continuously until reaching near-parity levels by the end of the sample period.

Chicago also experienced a significant home value
correction, but in contrast to Los Angeles Chicago experienced sustained price
decreases and no significant rebound in the recent period. Chicago's
delinquency spread peaked at 2 percent a year later than Los Angeles and
hovered between 1 percent and 2 percent through the end of the period.

Dallas, which TransUnion said was mostly insulated from the
housing crisis, had stable price conditions throughout the sample period. As a
result, its delinquency spread experienced little change over the sample
period, starting and ending below zero and moving within a narrow band.

"These market examples provide a glimpse into regional
dynamics and help explain how the mortgage crisis impacted consumer payment
patterns," Becker said.

Becker pointed out the study was completed using a series of
monthly cohorts of consumers from January 2008 through December 2011. Each
cohort was composed of consumers who had at least one mortgage, auto loan and
credit card open and in good standing as of the cohort definition month.

The credit performance of each consumer was evaluated 12
months later using a 30 days past due or worse definition of delinquency. Each
monthly sample included approximately 20 million.

Nick Zulovich can be reached at nzulovich@subprimenews.com. Continue the conversation with SubPrime Auto Finance News on LinkedIn and Twitter.


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