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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 – ok, 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 lookback 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 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, and helped open some spigots.

First things first. Some things have barely budged. The median household income in the US is up about five percent, as noted by the Census Bureau and cited by the Wall Street Journal. That’s adjusted for inflation. Much has been said about 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 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, foreclosures hit the headlines. We all know that lax underwriting standards came home to roost in this sector. It should be noted almost all mortgage security finance (ie 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, 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 $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 warnings 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 Too)

The World Economic Forum 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 percent of overall respondents – but just 28 percent of Millennials – agree with the statement that banks are fair ad honest.

The door is open, then, and has been, for FinTech in lending, and where inroads have been made in, say mortgages (like Lending Tree and RocketMortgage for example). The Federal Reserve noted earlier this year that FinTechs have been able to boost their percentage of US mortgage lending from two percent to six percent from 2010 to 2016 and 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 its former stamp as catering only to the wealthy. (Interestingly, personal loans are on the rise, noted the Wall Street Journal in August, growing by double digits and the $71 billion in 2008 is dwarfed by the $125 billion seen in 2018).

As for lending to businesses, banks have still been a bit reticent to lend to smaller firms, which per a Florida Atlantic University College of Business Study found that loans declined more at large banks than smaller ones. The market, then has been opened to online lenders who have filled that niche – and it should be noted here that community bank lending to SMBs have 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 o working capital loans.

Behind the Numbers

But even as the embrace of debt has returned, and the economy seems strong, and FinTech makes inroads into traditional means of getting a loan or a 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 six percent gain from last year. And as PYMNTS/Unifund found, some individuals and families who would seem to be on Read More…

Via:: General – PYMNTS


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