It was only a month ago that economists were talking about interest payments on debt for individuals in the US (the top G7 indebted country on a personal basis) being low and manageable as the job market was strong.
Fast forward to today and the same numbers have to be interpreted differently. The global economy is taking a hit and both businesses and individuals are at risk. We need to look at the facts & figures and then see what can be done by banks or fintechs.
`Consumer debt was approaching $14-trillion after the second quarter of 2019, according to the New York Federal Reserve. It was the 20th consecutive quarter for an increase.`
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Americans love credit cards and even if we get rid of the physical cards, credit card debt isn’t close to being shaken out of the system.
NPR’s Chris Arnold and Lucia Dunn professor from Ohio State University reported that close to 10% of credit card debt is over 90-days delinquent. These are levels approaching those of the great recession and could be sounding an alarm in a weak economy.
These delinquencies are concentrated in the 18-29yr old age group, which, unfortunately, also the age group with significant amounts of student debt too.
Student debt has 20% of double 90-days delinquencies, double that of credit card debt.
In other words, young people are overloaded with debt and delinquency rates have been increasing to dangerous levels. These are numbers before COVID19 and its impact.
The FRED reports that credit card debt has grown to $1 trillion (from debt.org) and another $1.6 trillion of student debt loans.
Personal loans have also been growing faster than student and credit card debt. CNBC reported $300billion as of Q2 2019 which represented an 11% yoy increase.
The black hole of consumer debt (homes, auto, student, credit card, …) is getting bigger and bigger. Low and down trending rates helped support an entire Fintech Refinancing and consolidation subsector that served consumers in great ways. However, none of these non-bank lending fintechs has helped reduce the outstanding debt and this is a Big issue now that the `shit hit the fan` (pardon my French).
More facts to keep in mind as we navigate through these unchartered waters
As the Fed stepping in with two emergency rate cuts already bringing rates down to zero, that does not mean that these have already trickled down to consumers. Everybody (including Fintechs) is not immediately lowering mortgage rates or other rates. Refinancing applications of all sorts are spiking.
`$10 trillion of mortgage backed securities debt are outstanding in the US market.
80% roughly is refinance-able`
Beware, lenders cannot handle this, simply because it will generate sudden accumulated losses and the origination capacity is no more than one third the demand.
Figure Technologies, the blockchain-powered lender that I covered last month, reported a 300% spike in applications for new mortgages and refinancing of HELOCs and student loans. And this was after the first Fed cut. HELOC holders are demanding more cash in hand, already.
Already homeowners have been taking out huge amounts from cash-out refinances. Black Knight reported that 600,000 homeowners withdrew about $41 billion in equity from their homes via cash-out refinances in Q4 2019. This was the largest quarterly volume since mid-2009.
Non-bank lenders are at great risk in these absurd market conditions and so are consumers.
These are also the conditions that alternative credit scoring will be stress tested.
Sources – NPR: U.S. Credit Card Debt Hits All-Time High, And Overdue Payments Rise For Young People Feb 13, 2020