According to conventional wisdom, or at least logic, the less income one has the more likely they would be to lie on a loan application due to disproportionate and non-scaled needs to obtain capital as well as the willingness – statistically speaking – to do so at any cost, even if it means lying. And while that would have been accurate 6 months ago, the latest quarterly UBS Evidence Lab survey of consumer credit reveals something surprising.
As UBS’ Matthew Mish writes, “the manipulation of risk estimates appears to be continuing for non-mortgage consumer loans. Specifically 26% of respondents (vs 25% in Q1) describe the factual accuracy of their loan applications (student, auto or card) as inaccurate.”
Translation: while the overall percentage of potential “cheating” borrowers is increasing, the chart below shows the unexpected finding is that while the proportion of those making $40-$99K in June responding their loan applications were inaccurate declined from March 31 to June 30, the percentage of respondents in the $100K and higher bucket spiked from 20% to 24%, which means that the wealthiest Americans are – as of this moment – as likely to lie on their loan applications as those making as little as $40K. Just as disturbing is that the incidence of lying on loan applications among the “richest” bucket Americans has jumped by far the most YTD, from 17% at the start of the year to 24% currently.
And while the above may come as a surprise, its tangent won’t: In explaining why consumers lie on the loan applications, UBS notes that 29% of lower income respondents and 41% of consumers state they are likely to default in the next year citing loan application inaccuracies. Said otherwise, lying on loan applications tends to result in default on said loan.
Finally, some big picture observations from UBS, which notes that the key takeaway from the Q2 survey results is a diverging prime/subprime consumer outlook. In aggregate, US consumers report a lower likelihood of defaulting on a loan payment in the next year (15% in Q2 vs 17% in Q1); that said, the low household income (<40k) cohort cited a rise in their default probability (13% in Q2 vs 9% in Q1, Figure 1). And the most commonly cited reasons why they may default is reduced income (22%), unexpected medical/nonmedical expenses (12% and 12%, respectively), and reached credit limit (12%). As UBS notes, it has consistently reiterated the lack of real (inflation-adjusted) wage growth outside of the top quintile as a key reason US households may be more vulnerable that the consensus perceives; further, there has been a structural rise in income volatility this cycle due to the rise of alternate work arrangements (i.e., the ‘gig’ economy).
via http://ift.tt/2uzQ4Eg Tyler Durden