Sense on Cents

Which economic statistic is the most important? Unemployment? Housing starts? Trade deficit? Inflation? Retail sales?

Well, they are all important . . . but as I review the many statistics, the economic data that I believe most significant are loan delinquencies. Now, mind you a delinquency does not mean that the loan has defaulted and been foreclosed upon. A delinquency is merely a late payment. Typically loans are classified as 30 day, 60 day, or 90 day delinquent. There is a very high correlation between delinquent loans and those that default.

Loans become delinquent for a whole host of fairly typical reasons. That said, in this economy the nature and array of reasons are growing. As a result, the ability of lenders to forecast and manage delinquencies is increasingly more challenging. Lenders will typically increase reserves as loans become more delinquent in anticipation of a natural rate of default.

Loan delinquencies will often occur even before unemployment hits or sales falter. As individuals or companies feel increasingly squeezed, the monthly loan payment becomes more difficult to make and delinquency results. (more…)