Mortgage and Credit Card Lending Versus Delinquency

Years ago I used to work for a finance company and we were always trying to make loans and keep our delinquency down as low as possible. The size of the office was $3,000,000 in outstanding loans. Every month we ended up having $65,000 of accounts that were 60 days delinquent, which was pretty good. This represented a 30 day delinquency rate of 2.16%, ($65,000/$3,000,000). The manager of another one of our branches was experiencing a little bit of a problem with his delinquency that month, even though he normally had it under control.

Right at the beginning of the month he was able to identify several accounts with large balances that would not be able to make payments that month. This would really leave him in a situation where his delinquency rate for 60 day accounts was going to be really high. During a meeting with all of the other managers he said it would not be a problem because he had planned on loaning his way out of delinquency. Being new in this business I was a bit puzzled. You are going to loan your way out of delinquency, I said? How do you plan on doing that? He responded, well I am just going to make more loans and the delinquency won't be as bad.

How can making more loans make your delinquent accounts go away? He said they won't go away but allow me to explain. Using my numbers if you have $3,000,000 with $65,000 30 days past due then the percentage of delinquency is 2.16%. All I have to do is make more loans. If I increase my outstanding loans to $3,500,000 my delinquency rate goes down to 1.85%. Ah ha! I see.

What a strategy. You hope that the new loans outstanding won't translate into more delinquent loans which is what usually happens.

Well credit card companies and mortgage companies are seeing some of the worst delinquency numbers in years. Credit card charge offs are at record levels and the mortgage industry has the worst rate of foreclosures ever. It's a good thing they don't try to loan themselves out of delinquency that would be a fiasco. In today's economic environment that would really create a problem because of the amount of people losing their jobs and the number of people that will continue to lose their jobs. Making additional loans would not solve the problem at all.

In today's economy it's hard to say what is going to work to get our economy rolling again. Do we create the jobs first so that more people have spending power which in essence will boost the economy? Or do we force the banks to start lending again which allows consumers to make purchases for homes and automobiles and other consumer goods? If we can do both simultaneously then that will probably be the formula for pulling the economy out of its slump.