TransUnion has found a “direct correlation” between what a borrower’s monthly debt obligations are compared to their gross monthly income as an early indicator of possible mortgage delinquencies.
PTI, or payment-to-income ratios, “can help lenders more accurately identify consumers who may be at higher risk” of becoming late on their house payments, the credit repository says. Moreover, it notes the ratio can uncover patterns of credit behavior that “often precede changes in credit scores.”
TransUnion’s claim is based on an analysis the company conducted throughout last year that focused on how rising debt levels and fluctuations in PTI across various credit products — including credit cards, home equity lines of credit, and student loans — may serve as early warning signs of financial stress.
These trends were evaluated specifically among the nearly 57 million mortgage consumers who were current on their loans at the time of the study, providing what the company says is “a broad and relevant sample for assessing emerging risk factors.”
The study revealed “a strong and consistent” link between changes in PTI for non-mortgage products such as credit cards and subsequent increases in mortgage delinquency rates in the following year. A similar trend emerged when analyzing PTI ratio patterns for both HELOCs and student loans.
The findings underscore “the importance of monitoring PTI trends over time across a consumer’s entire credit portfolio,” TransUnion says.
An increase in PTI shows “a clear and consistent positive correlation” with a rising likelihood of mortgage delinquency, said Jason Laky, executive vice president and head of financial services for the global information firm: “As borrowers allocate a greater portion of their income toward servicing these types of debt, their ability to stay current on mortgage payments may become increasingly strained.”
The company is calling on lenders to implement “a consistent and proactive schedule” for collecting consumers’ cross-wallet credit data to gain the earliest possible insight into delinquency risk. “Ideally,” TransUnion says, data should be collected “on a quarterly basis.”
“This deeper, historical perspective enables more informed risk assessments and enhances the ability to anticipate financial stress before it becomes visible through traditional scoring metrics.” according to TransUnion.
Trended credit data can help “pinpoint consumers who are at a higher likelihood of becoming delinquent,” said Senior Vice President Satyan Merchant, “and, importantly, enable lenders to proactively contact and work with consumers at heightened risk of default to help them stay on track and avoid falling behind on payments.”
