Let's Talk Loans Vol. 40
They say 40 is just a number. As a guy who is about to hit 45, I'm not sure my body agrees. But welcome to the 40th edition Let's Talk Loans, where we talk about what's trading and trending in lending from the eyes of the Raymond James Whole Loan Desk. I hope you enjoy these musings and if you do please refer to a friend, like or repost!
I have to take a moment and admit my surprise, shock and great pleasure with the following headline from the American Banker this week.
According to the latest data from Bankrate, the interest rate for a 60-month new auto loan averaged 6.85% for U.S. credit unions in January — higher than the average 6.29% for U.S. banks and 6.05% for thrifts.
We analyze hundreds of depositories portfolios in any given year. While I respect what Bankrate is reporting, I haven't seen it yet in our analysis. CUs have raised rates sharply but are still lagging. We were early to see that credit unions were vastly underpricing this market. We work very closely with clients on auto lending to help shape the rate sheet and make strategic revisions based on what we see trading in the secondary space. Those that got ahead of this have benefited greatly and are still able to sell loans at stronger pricing. Those who were late to the game got stuffed with a lot of underwater loans, left money on the table and are now scrambling for liquidity. This is the benefit of being a data driven lender and using analytics to have a thoughtful approach to lending. My comment in the American Banker Tuesday:
The recent rise in rates at credit unions is due primarily to their need for liquidity, said John Toohig, head of whole loan trading at Raymond James. "[Credit unions] are forced to raise their auto rates as the fight for deposits becomes more fierce," he said.
After posting this earlier in the week, several of you had some great comments to the article. I think it's a fair argument to quote 72 and even 84 month rates vs 60 month in this market. Terms have been edging longer for several years now. 60 month lending is still common but we see more than half the portfolio in 72 or 84 month lending for most clients. Still, the fact that credit unions took over the #1 position in market share from banks due to lower rates will likely start to ebb now that they are being forced to raise rates.
Following up on this weeks discussion with Mark Zandi from 穆迪分析 .
In our hour long chat, his forecast is a baseline (55% probability) of a "slowcession". Increasingly in the media you're hearing of a "soft landing" or a "hard landing". Mark was quick to point out he's outside of the mainstream right now with the concept of a "no landing". It's not stagflation (high inflation, high unemployment, low growth) but coining the term slowcession is keeping us just out of a recession with falling inflation, relatively strong employment and slow growth.
So while his baseline was 55% "slowcession" he admitted that the sky is cloudy. There is a 45% chance of a recession with the Fed in control of part of our fate. If we were to get to 6% rates (as some have suggested), that would likely send us over the edge. He saw 2, maybe 3, more 25bps hikes. March and May are likely, June is a maybe. Then a pause with rates remaining steady for the rest of 2023. Other points of conversation were the potential for a drop in property values, what signs to watch for that might point to a recession (the consumer sentiment) and it was a great overall chat. If you want access to the replay, shoot me a note.
CPI this week continued the work that the recent jobs number, retail sales number and yesterday's PPI number have done to the pivot hopeful. The market got ahead of itself (again) with the chance that we might see the Fed relent sooner rather than later. CPI came in largely as expected but still persistently / stubbornly high. These economic indicators likely give fuel to Powell to hold rates higher for longer and the market is struggling to come to terms with that reality. I cobbled together the below graph from Bloomberg. On the left, implied number of hikes as interpreted by the market pre jobs number. In the middle, Tuesday's rate reaction just prior (top) to the CPI announcement, immediately after the announcement (middle) and the resounding defeat and acceptance of higher rates at the market open (bottom). You're looking at nearly a 20bps swing in yields on the 2 year in a day. Glad volatility has been tamped down (sarcasm). The forward rate hike forecast after the CPI number on the right. Nearly one month ago (Jan 18th) the 2 year was 4.08%. We sit north of 4.60%. The 10 year (Jan 18th) was 3.36% and now we are at 3.85%.
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Lastly, I'll finish off with the NY Fed's news on Household Debt. There are a number of doozy headlines here and we have plenty to unpack.
"Credit card balances increased $61 billion in the fourth quarter to $986 billion, surpassing the pre-pandemic high of $927 billion."
"Total household debt in the fourth quarter of 2022, increasing by $394 billion (2.4%) to $16.90 trillion. Balances now stand $2.75 trillion higher than at the end of 2019, before the pandemic recession."
"The share of current debt transitioning into delinquency increased for nearly all debt types"
Let's focus on DQ trends for a moment. Going back to our chat with Mark Zandi, there are parts of the consumer that are showing some signs of stress. Lower tier credit auto, credit card, some lower tier credits of personal loans. You can see that in the transitioning from current to 30 day numbers that the NY Fed posts. You have a tick up in credit card and auto that is visible. Mortgage not as much but clearly outperforming other consumer loans. Student loans don't count since you have the payment pause in place.
Liberty Street Economics (NY Fed's blog) does a deeper dive into both autos and cards and points out that not all borrowers are performing equally. Younger borrowers (likely with lower incomes / savings) are being harder hit by rising interest rates, particularly for cards. We're seeing consumer debt start to take up a significant percentage of the consumers monthly debt service and those younger borrowers are showing signs of stress. Couple that with inflation (higher prices), the retiring of stimulus programs (less surplus cash), having to stretch a dollar further and that's taking the form of higher delinquencies. NY Fed didn't believe it was related to diminishing credit standards. Felt that cards (floating rates) were more heavily impacted by rising rates than auto loans (fixed rates).
The good news being their conclusion:
While person-level delinquencies are high, we do not anticipate widespread stress for lender portfolios as balance weighted delinquencies remain at or below pre-pandemic levels. But, on a person-level, this financial distress is real, and the delinquent marks will impact their access to credit for years to come.
We're about to hit the conference circuit. Solar ABS chat on Tuesday the 28th in Vegas for SFIG. Look forward to seeing you there!