Pandemic Affects Consumers Unequally, Exacerbating Pre-2020 Trends

US borrowers with weaker credit have been disproportionately affected by the recession, and securitizations backed by these borrowers are more vulnerable to asset-performance volatility in the absence of government aid and forbearance, given household debt and elevated unemployment, Fitch Ratings says in its new report Pandemic Accelerates Bifurcation in U.S. Consumer Loan Trends.

Unprecedented federal government stimulus and forbearance measures have supported consumer loan performance, leading to historically low delinquencies. All consumer loan types have experienced a reduction in late-stage delinquencies since 1Q20, with student loans, credit cards and autos seeing continued declines through 4Q20. The most recent round of stimulus will provide a near-term financial boost to lower- and middle- income individuals in particular.

However, when government aid ends and forbearance expires, weaker borrower loan performance is expected to worsen from current strong performance due to significant job losses that affect lower-income individuals more severely. Subprime auto, certain segments of student loans, retail credit cards, and unsecured consumer lending are areas with the most downside risk.

Prime consumer asset performance metrics will likely normalize from current lows to historic trends as these borrowers have recovered more quickly from the economic downturn.

The increase in real disposable income due to government stimulus, coupled with a sharp decline in personal consumption as a result of widespread shutdowns that limited spending and travel, led to massive spikes in personal savings. The high household savings ratio and a decline in mortgage rates have supported spending on housing, particularly by borrowers with FICO scores above 760. Another consumer spending is down as a result of lockdowns and increased unemployment. Additionally, many traditional lenders have pulled back from higher-risk lending, restricting access to credit for those with weaker credit profiles.