Garnet Capital Advisors Blog

April 1, 2014

Plight of Millennials could undermine loan origination

Millennials are facing myriad challenges, and these difficulties could constrict their demand for credit and undermine loan origination.

Young Americans suffer falling wealth
Many young families have seen their net worth decline sharply over the last several years, according to research conducted by two Federal Reserve economists, Bloomberg reported. William Emmons and Bryan Noeth of the St. Louis Fed said in a recent report that households headed by a person 40 years old or younger have suffered an average drop in wealth of 30 percent since 2007.

The market experts asserted that a major cause of this decline in net worth was families tying up their household wealth in real estate, and financing these home purchases with significant leverage, according to the news source. After relying heavily on financing, many of these households defaulted on their mortgage payments amid a deteriorating labor market and depreciating home values.

Labor market challenges persist
According to The Columbus Dispatch, many young Americans are still coping with a tough labor market - even those with degrees and work experience. People born between 1980 and 2000 have a high jobless rate. More specifically, a slim majority of those in their late 20s hold a full-time position, and 1 out of every 3 in their early 20s have this employment status, according to a recent Georgetown University study.

In addition to facing high joblessness, young Americans are frequently underemployed, holding positions that do not require a degree or are not full-time, according to the news source.

People who have a full-time job might be underemployed in a different way. They could be overqualified for their position, or could be doing tasks not in-line with their career objectives. Individuals with advanced degrees might suffer skills atrophy, meaning their knowledge could go unused and deteriorate, or they may never find a job in their field of study.

"They really got slammed by the Great Recession compared with other age groups," Alicia Sasser Modestino, who works for the Federal Reserve Bank of Boston's New England Public Policy Center as a senior economist, told the news source. She wrote about these challenges late last year in a report she co-authored. "This is where you get the term 'lost generation' from."

Student loan burden
Another factor that could affect the demand that young Americans have for credit - and therefore loan origination - is student loan debt. Millennials have been working hard to pay off their liabilities since the financial crisis, Emmons told Bloomberg. People in this group saw their debt plunge an average of 23.7 percent between 2007 and the third quarter of 2013, the economist estimated.

However, they still face a substantial overhang of student loans, as data provided by the Fed's 2010 Survey of Consumer Finances revealed that 66 percent of the installment debt of people younger than 35 was held in obligations stemming from education, according to the news source.

This burden, along with challenges finding high-paying work and saving money, could easily combine to constrain loan origination for some time.