Are Millions of Americans About to Default on Their Mortgages and Loans?

Point of Interest

New data shows 14% of Americans could default on their mortgages, auto loans, and other debts in the months ahead due to the pandemic.

As unemployment continues to soar due to COVID-19, the nationwide shutdown is placing a substantial burden on consumers and their debt. It’s one of the many concerns that has led the U.S. government to inject trillions of dollars into the economy, in an effort to limit the economic fallout from the pandemic.

Some analysts argue it’s only a matter of time before consumers start defaulting on their loans, while others say the safety net programs set in place by the government will be enough to tide everyone over during the shutdown. However, nearly all economists seem to agree any economic projection is heavily dependent on the length of the current economic shutdown.

A recent survey by UBS, which surveyed 2,000 households in the first three weeks of March, indicates early signs of consumer stress about unemployment and debt. Roughly 43% of the survey pool reported income barely or not exceeding expenses, and 14% stated they were likely to miss a payment. Among households likely to miss a payment, respondents said they were most likely to default on their credit cards, followed by mortgages and auto loans

UBS said the survey results suggest that for every 1% rise in unemployment, defaults will rise 1.0%, 0.3% and 0.8% for mortgage, auto and credit card loans, respectively. UBS also estimates roughly $950 billion, $110 billion and $60 billion of mortgage, credit card and auto debt could be delinquent by the end of 2020, based on unemployment rate changes versus 90-day delinquency rates since 1999. 

The new data from UBS marks the latest sign of an economic slowdown and a potentially weakening consumer lending market due to COVID-19. Several major U.S. banks are bracing for a wave of loan defaults and have set aside record amounts to their loan loss reserves in the first quarter. For instance, JPMorgan Chase set aside $6.8 billion more for loan losses this year compared to last year, totaling $8.3 billion.

Online lenders are also starting to feel the impact of coronavirus, according to a survey by fintech company dv01. As of early April, roughly 12% of consumer loans made by online lenders are “impaired,” which means they are either past their payment due dates or borrowers have skipped payments due to an extension given by their lenders. The data from dv01 takes into account loan performance activity reported from January 2019 through March 25, 2020, and looked at over 1 million active loans with a total outstanding balance of over $10 billion from large online lenders in the U.S.

According to dv01’s data, the majority of the impaired loans are due to lenders shifting away from delinquency and modifying loans for borrowers experiencing hardships.

Dv01 CEO Perry Rahbar and principal analyst Vadim Verkhoglyad say in the report that new loan modifications are taking the place of delinquencies.

“New modifications substantially outnumber new delinquencies, granting borrowers with job or income impairments crucial time to improve their financial standing without impacting their credit standing via defaults or impacting investors’ performance via costly losses,” according to the report. “We expect this trend to continue.”

Alex Gailey

Financial Reporter

Alex Gailey is a financial reporter at Interest.com who specializes in banking, deposits, mortgages and personal finance. Her writing has been featured in Yahoo Finance, MSN, Atlanta Business Journal, Charlotte Business Journal, The Boston Globe, The Simple Dollar and elsewhere.