Stress Testing Household Debt

47 Pages Posted: 19 Feb 2019 Last revised: 21 Feb 2019

See all articles by Neil Bhutta

Neil Bhutta

Board of Governors of the Federal Reserve System

Jesse Bricker

Board of Governors of the Federal Reserve System

Lisa J. Dettling

Board of Governors of the Federal Reserve System

Jimmy Kelliher

Board of Governors of the Federal Reserve System

Steven Laufer

Board of Governors of the Federal Reserve System

Date Written: 2019-02-13

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

Suggested Citation

Bhutta, Neil and Bricker, Jesse and Dettling, Lisa J. and Kelliher, Jimmy and Laufer, Steven, Stress Testing Household Debt (2019-02-13). FEDS Working Paper No. 2019-008. Available at SSRN: https://ssrn.com/abstract=3336045 or http://dx.doi.org/10.17016/FEDS.2019.008

Neil Bhutta (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Jesse Bricker

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Lisa J. Dettling

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Jimmy Kelliher

Board of Governors of the Federal Reserve System

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Steven Laufer

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States
202-475-6608 (Phone)
202-728-5889 (Fax)

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