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Subprime, Deep Subprime Outstanding Balances Increase 33 Percent

September 03, 2009

COSTA MESA, Calif. and NEW YORK — Subprime and deep subprime outstanding balances have grown 33 percent in the past three years as consumers continue to migrate to lower credit bands, according to the Experian-Oliver Wyman Q2 2009 Market Intelligence Reports.

The number of consumers in the superprime grade, as measured by Experian’s VantageScore, has declined by 10 percent since the third quarter 2008.

"Our analysis further indicated that while loan originations increased by 38 percent from Q4 2008 to Q1 2009, driven primarily by a mortgage refinancing wave, the increase was limited to the most creditworthy consumers," said Charles Chung, Experian's senior vice president and general manager of Decision Sciences. "In fact, originations actually declined for subprime and deep subprime consumers, a reflection of lenders' continued reduced appetite for credit risk."

Developed jointly by Experian, a global information services provider, and Oliver Wyman, the international management consulting firm, the Q2 2009 Market Intelligence Reports also found that lenders are continuing to manage their risk exposure by aggressively reducing credit lines on revolving loans such as bank cards. Over the last 12 months, bankcard credit lines have declined from $3.8 trillion to $3.1 trillion, a 17 percent decline.

Looking at the economic climate as a whole, several loan products experienced a leveling off of early- and mid-stage delinquency rates in the second quarter 2009. This seems to be a seasonal trend, driven by tax refunds in April and May, according to the report. However, roll rates to late-stage delinquencies and charge-offs continue to be high. In areas like California and Florida, where real-estate troubles have had a negative impact on other products, delinquency rates remain above the national average.

Experian and Oliver Wyman also completed a report on strategic defaulters — borrowers who default on their mortgages only because the value of their home has declined well below their mortgage balance. The report showed that borrowers in the superprime and prime credit score categories are 50 percent more likely to engage in strategic default than those with lower credit scores.

Furthermore, the report shows a segment of borrowers that closely mimics strategic defaulters but would be favorable candidates for loan modification — "cash-flow managers." Unlike strategic defaulters, these borrowers continue to make occasional payments on their mortgage, indicating their intention to get out of delinquency.

"While 60 percent of strategic defaulters are charged-off within six months after serious delinquency, one-third of cash-flow managers cure on their mortgage within six months after serious delinquency and another third remain less than 90 days past due," said Piyush Tantia, a partner in the retail and business banking practice of Oliver Wyman. "Therefore, cash-flow managers represent the borrowers who would make the best candidates for loan modification offers. The impact to businesses that successfully identify and address the two segments can be significant."

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