First Quarter Credit Card Charge-offs Increase, Delinquencies Decline: Fed

The jury may still be out on U.S. consumer credit card charge-offs trends. The latest data from the Federal Reserve shows that the seasonally adjusted credit card charge-off rate trended higher in the first quarter of 2010, up 5 percent from the fourth quarter 2009. Meanwhile, the total charge-off and delinquency rates on all loans reached an all time high during the quarter.

The average credit card charge off rate reported by all banks to the Federal Reserve in the first quarter was 9.95 percent, up from the 9.47 percent rate reported in the fourth quarter of 2009. The delinquency rate for credit cards dropped to 5.78 percent in the first quarter, the lowest rate since the fourth quarter of 2008.

Delinquencies are defined by the Fed as loans past due thirty days or more.

The numbers were a departure from the short trend established in the fourth quarter of 2009. The charge off rate that quarter was down sharply from the 10.25 percent rate reported in the third quarter of 2009, the highest rate in Fed records.

In contrast to the Fed numbers, Fitch Ratings said last month that charge-off rates for credit cards declined in the first quarter, though the average charge-off rate for credit cards was still above 10 percent. (“Fitch: U.S. Credit Card Delinquencies Fall to Six-Month Low,” May 3). But Fitch noted that the decline in their reported charge off rate was driven by a massive drop off at Bank of America, whose credit card charge-offs have been highly volatile.

Fitch Ratings Managing Director Michael Dean said the ratings agency still believes credit card charge offs will remain elevated and near historical highs through year’s end. But he said delinquencies appear to be softening because of steps lenders began taking in late 2008 to purge troubled accounts from their portfolios.

“Chargeoff rates have been holding steady at over 10 percent for a full year now so the pressure on U.S. consumer credit quality is still clearly evident,” said Dean. “On the positive side, cardholder defaults have plateaued so some seasonal improvement should emerge as we head through the summer months. However, sustained improved will hinge on the employment situation over time.”

The Fed said the charge-off rate for all loans increased one percent during the first quarter ending March 2010 to 2.96 percent. But charges-offs were up nearly 43 percent from the first quarter of 2009. Total delinquencies on all loans increased 2.7 percent to 7.36 percent, and were up 30.7 percent points from first quarter 2009.

Loan securities analysts say the spike in residential mortgage charge-offs and delinquencies likely helped drive the increase in credit card charge offs and delinquencies. Though the Fed said first quarter residential charge-offs declined nearly 12 percent from the previous quarter, residential loan delinquencies reached an all-time high in the first quarter: 11.39 percent of all real estate loans.

Fitch Managing Director Vincent Barberio said mortgage delinquencies have been rising steadily for years as more borrowers realized they owed more on their homes than it was worth.

“The combination of rising unemployment and negative equity is home is probably a strong driving point in delinquencies rising in that sector,” he said.

Barberio added, however, that serious delinquencies on high risk mortgages declined in April for the first time in four years. According to Fitch’s latest Performance Metrics results subprime late-pays also fell for the second straight month, although prime mortgage delinquencies increased slightly.

Barberio attributes the improvement to more homeowners catching up on their payments, receiving modified loans or liquidating.

“Last month’s improvements may be a signal that residential mortgage backed securities performance is beginning to the turn the corner,” Barberio said. “The next few months will be a better indicator of whether we’re witnessing the beginnings of a legitimate turnaround or a short-term seasonal effect of tax-refunds.”

Fitch also cautions that approximately 8 percent of current first mortgage loans and 35 percent of current subprime loans are modified and have a substantial risk of re-default.