Stress Testing Household Debt
34 Pages Posted: 19 Jan 2021
Date Written: December 11, 2018
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 stress tests, we ﬁnd that forecasted delinquency rates for the 2017 Q4 stock of debt are moderately lower than for the stock of debt before the 2007–9 ﬁnancial crisis, given the same set of shocks. We trace the decline in expected delinquency rates under stress to an improvement in debt-to-income ratios and an increase in the share of debt held by borrowers with relatively high credit scores. We also consider several alternative scenarios, including one where the size of house price shocks depends on current housing valuations. Under this scenario, we forecast a much lower delinquency rate than occurred during the crisis, as housing valuation measures were much more benign in 2017 than they were precrisis.
Keywords: loan default, stress test, household debt, delinquency, ﬁnancial stability
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