The latest FICO survey of bank risk managers shows increasing concern about a housing bubble that threatens to burst.
The quarterly survey polled 203 bank risk managers across the United States and Canada in May 2014 and revealed that 56% of them are worried that the real estate bubble is inflating at an unsustainable rate. Six million homeowners are already underwater on their mortgages – meaning they have negative equity in their homes. The average amount of negative equity is 33%.
In spite of this, home prices across the country are on the rise. Overall, homeowner equity in the U.S. is the highest its been since 2007.
Mortgage approvals fraught with concerns
When considering an application for a home loan, bank risk managers are most concerned with consumers having too much debt and too little income. Fifty-nine percent said that a high debt-to-income ratio was their biggest worry when looking at a potential borrower’s application. Multiple applications for credit gave 13% of bank risk managers pause, and 10% were most worried about borrowers’ low FICO scores.
The FICO score is a commonly-used measure of consumer creditworthiness and is based on a person’s payment history, amount of debt, available credit, number of credit applications, types of debt, and length of credit history. Scores range from 300 to 850. FICO looks at information from the three major credit bureaus – Experian, TransUnion and Equifax – to determine consumers’ FICO scores. A score under 620 is considered poor, while a score of 720 or more is excellent.
Increasing credit card debt impacts mortgages
With a recovering economy and increased consumer confidence, credit card balances have been on the rise. Consumers are more willing to take on debt and more confident they will be able to pay it off.
However, bank risk managers are watching this trend with some concern. In the last two FICO surveys, about 65% of respondents indicated that they felt credit card balances would increase. “Those are the highest figures we’ve ever seen in this survey. When I talk with bankers, they tell me they’re happy to see growing consumer optimism, but they’re wary of a return to reckless borrowing,” said Mike Gordon, an executive vice president at FICO.
Small business lending looking up
In contrast to the concern about mortgages and increasing credit card debt, bank risk managers were feeling optimistic about small business lending this quarter. Only 26% of those surveyed expected small business loan delinquencies to increase over the next six months. Thirty-four percent of respondents in last quarter’s survey expected an increase in small business delinquencies.
Only 28% of bank risk managers expected the demand for small business credit to outstrip supply in the most recent FICO/PRMIA survey, compared with 40% in the previous quarter’s survey.
FICO, an analytics firm that provides credit-scoring services, works with the Professional Risk Managers’ International Association (PRMIA) to gauge the mood of bank risk managers in North America four times a year.