Predicting Consumer Default Patterns during Times of Uncertainty

Recent events like the 2008 Financial Crisis and COVID-19 pandemic have forced governments to adopt unprecedented policies to ensure consumers’ economic security. In response, both policymakers and the private sector have observed a shift in consumer behavior. In the last two decades, households' decisions in prioritizing which type of debt to pay off have shifted as the U.S. federal government enacted more consumer protections. Given the role that mortgage defaults played in the 2008 Financial Crisis, understanding how consumer behavior is responding to the changing economic conditions and policy landscape is essential in identifying where future risks may emerge in the financial system.   

The objective of this project was to create a commercially useful product that would be relevant to different industries sensitive to consumer defaults. Clients can use this model to determine what default patterns and levels they should expect given the current and immediate future economic conditions. The client can then adjust business strategies and invest in financial assets accordingly. The Capstone team used data on past consumer defaults, behavioral factors, policy environment, and macroeconomic indicators to construct a quantitative model that predicts the patterns and levels of consumer defaults expected across four loan categories under projected macroeconomic conditions. Based on the predicted default patterns, the team identified future default sequences and the extent of the impact on different industries. Using this model, the team presented a final case study on potential future strategies for hedge funds in response to shifts in consumer sentiment and government policy.