Moody’s: Fiscal cliff could affect not just taxes, but loan default rates as well

Using software to stay solvent during uncertain times

The upcoming fiscal cliff that is expected early next year has some consumers worried about tax rates, the federal deficit and the European debt crisis. But Moody’s Investors Services is reminding financial institutions of the possible consequences to current and future loans and mortgages, suggesting a growing importance of credit scoring software.

Though housing prices and sales have both been improving since the financial crisis, it’s possible that the new changes could cause the trend to reverse. As HousingWire explains, if the fiscal cliff causes a feared recession, housing prices may start to decline and keep buyers from refinancing.Combined with a high unemployment rate, this could cause mortgage default rates to rise after months of falling.

As the Royal Bank of Scotland’s Co-head of Agency MBS Strategy, Jeana Curro, explained to HousingWire, it is possible that the recession could “lower the prospects for refinancing performing loans maturing in the next few years and increasing the severity of defaulted loans.”

Using software to stay solvent during uncertain times

While fiscal cliff fears remain largely concerned with tax hikes and the federal budget, the implications of the changes are not expected to remain in a vacuum. As the Federal Reserve continues to encourage borrowing, both directly in speeches and indirectly through falling bond purchases, the upcoming economic changes could cause increasing loan applications but with less of a cushion to fall back on. For banks and credit unions making loans, credit risk management software can help financial institutions continue to lend funds while remaining profitable themselves.

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