Stress testing household debt

Neil Bhutta, Jesse Bricker, Lisa Dettling, Jimmy Kelliher and Steven Laufer

Journal of Credit Risk

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 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.

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