Consumer Finance

A Decade On, Lending Transformed By Crisis And Innovation

Necessity is the mother of invention.

Invention can become necessity. And in lending, with the financial crisis in the rearview mirror, a decade on, invention – okay, innovation – has become a hallmark, at least in some corners.

Any number of musings have graced any number of websites these past few days about what it all meant and means. The trigger for the look back has of course has been the Sept. 15, 2008 fall of Lehman, which filed for bankruptcy that day.

The rise of FinTech offers a bit of a prism through which to view those events. The traditional banking model may be disrupted, or about to be disrupted, depending on where you look. But a standstill in the credit markets created a vacuum for a bit, at least along traditional lending conduits. Yes, the government(s) stepped in around the world, and here in the United States, $1.5 trillion in stimulus came across to all sorts of financial institutions over the ensuing five years, helping to open some spigots.

First things first. Some things have barely budged. The median household income in the U.S. is up about 5 percent, as noted by the Census Bureau and cited by The Wall Street Journal. That’s adjusted for inflation. Much has been said about the wealth effect of those who held and hold stock market securities, and much has been written about income disparity. But if the median income is within spitting distance of where it once was, credit has loosened up – to the point where all told, consumer debt totals about $13.3 trillion as noted by recent readings, a boost of $454 billion year over year.

This is the 16th straight quarter that debt has increased on a year-on-year basis, indicating just how far we have come since the Great Recession in terms of an embrace of credit … for better or worse.

Mortgages and Credit Cards and Student Debt…

Mortgages? At the peak of the crisis, the delinquency rate was 10 percent in 2010, as underwater mortgages and foreclosures hit the headlines. We all know that lax underwriting standards came home to roost in this sector. It should be noted that almost all mortgage security finance (i.e., security issuance) is done through government-backed firms, even in the wake of the Fannie and Freddie bailouts of a decade ago. Now, tighter standards in the wake of Dodd-Frank’s 2010 passage helped get that down to about 4.3 percent. Total mortgage debt of one to four-family residences, as measured by the Federal Reserve, stood at $9 trillion as compared to $9.3 trillion at the peak of the financial crisis.

Outstanding credit card debt is at the second highest point seen since the end of 2008, and total outstanding debt stands at $1 trillion. Student debt was at $545 billion at the end of 2007, just ahead of the financial crisis, and now stands at more than $1.5 trillion. Much has been made in these pages about the warning signs that may be in the offing, as risk appetite has returned to lenders amid a booming economy. Auto loans have mushroomed from $773 billion in 2008 to $1.2 trillion this year.

But look under the hood, and a few things are indeed different.

The Demographic Shift (and Other Shifts)

The World Economic Forum (WEF) has noted that half the world’s population is under 30, and a 2017 survey has found that the traditional financial services model – aka the banks – has no real place in the younger generations’ hearts. A survey by the Forum found that about 45 percent of overall respondents – but just 28 percent of millennials – agree with the statement that banks are fair and honest.

The door is open, then, and has been, for FinTech in lending, where inroads have been made in, say, mortgages (like Lending Tree and Rocket Mortgage, for example). The Federal Reserve noted earlier this year that FinTechs have been able to boost their percentage of U.S. mortgage lending from 2 percent to 6 percent from 2010 to 2016, and to process mortgages 20 percent faster than other lenders, per a report titled “The Role of Technology in Mortgage Lending.

Banks are getting into online initiatives, evidenced by Goldman Sachs building a consumer-facing business beginning two years ago and moving beyond catering only to the wealthy. (Interestingly, personal loans are on the rise, noted The Wall Street Journal in August, growing by double digits: The $71 billion in 2008 has been dwarfed by the $125 billion seen in 2018).

As for lending to businesses, banks have still been a bit hesitant to lend to smaller firms. A study from the Florida Atlantic University College of Business found that loans declined more at large banks than smaller ones. The market, then, has been opened to online lenders that have filled that niche – and it should be noted that community bank lending to SMBs has been on an upward trend. Yet room is still there, of course, for tech-nimble upstarts like Square and PayPal, where machine learning and other avenues of data collection and analysis can help pull the trigger on working capital loans.

Behind the Numbers  

But even as the embrace of debt has returned, the economy seems strong and FinTech makes inroads into traditional means of getting a loan or mortgage, the headline numbers tell only part of the tale. For once the credit is gotten, how is it used?

We noted in this space a few months ago that per the July 2018 Financial Invisibles Report, a third of consumers have been falling behind on bills, which is a 6 percent gain from last year. And as PYMNTS/Unifund found, some individuals and families who would seem to be on solid ground are in fact on shaky footing.

The group that has been named “Second Chances” are the ones that have had past financial issues and are now rebuilding – marked by being relatively young, at 42 years old, and with income of $63,000 per year. As many as 66 percent of them have credit cards, and 79 percent of them live paycheck to paycheck. Half of them say monthly bills are higher than monthly income, with a looming struggle to pay bills. This cohort makes up 27 percent of U.S. consumers.

And so we might note that amid a mixed picture – with a strong economy, middling wage growth, high debt levels and pockets of struggle along with a lending spigot that has opened in the wake of the financial crisis – history may not repeat itself, but might it rhyme?

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