Stress Testing Household Debt

Abstract

We estimate a county-level model of household delinquency and use it to conduct "stress tests" of household debt. Applying house price and unemployment rate shocks from Comprehensive Capital Analysis Review (CCAR) stress tests, we find that forecasted delinquency rates for the recent stock of debt are moderately lower than for the stock of debt before the 2007-09 financial crisis, given the same set of shocks. This decline in expected delinquency rates under stress reflects an improvement in debt-to-income ratios and an increase in the share of debt held by borrowers with relatively high credit scores. Under an alternative scenario where the size of house price shocks depends on housing valuations, we forecast a much lower delinquency rate than occurred during the crisis, reflecting more reasonable housing valuations than pre-crisis. Stress tests using other scenarios for the path of house prices and unemployment also support the conclusion that household debt curren tly poses a lower risk to financial stability than before the financial crisis.

Keywords: Delinquency, Household debt, Loan default, Stress testing

JEL Classification: D14, G01, E37