September 6, 2022
During the economic upheaval of the pandemic, delinquency rates fell considerably as the result of both deferred payments and stimulus checks to keep everyone afloat during the ongoing health and quarantine crisis. As we see delinquency rates returning to pre-pandemic levels combined with troubling inflation, however, loan-buying investors are moving more cautiously.
Right now, there is a softening in consumer and commercial performance environments. It should be unsurprising to learn that loan delinquency is on the rise in the face of fading pandemic benefits and a painful increase in the costs of basic necessities like housing (rent prices,) gasoline, and groceries. The impact of these rising costs has had a disproportionate effect on debtholders from lower incomes, therefore a disproportionate impact on lenders that have extended credit to lower credit-scored borrowers.
While larger banks with more low-risk lending practices still report strong repayment rates, those who focus on low-income borrowers have seen a noticeable increase in both delinquencies and charge-offs.
The lending market is in a unique place right now. While delinquencies are on the rise, there is still a strong likelihood that many borrowers will continue to pay their loans, especially if the cost of food and gas normalizes soon. With record low unemployment rates, people are working, and a steady income is a good indicator of loan repayment.
Low-income families have the least margin for changing prices. What were practical household budget and loan repayment plans can quickly turn into barely making ends meet, and there may not be enough for loan repayment after groceries and rent - especially for those already dipping into limited savings to stay afloat until prices or income can balance out.
This creates the current disparity between the spending and loan repayment habits of those above and below the fold. With prices rising and lurking inflation, the poverty line has effectively risen, and not everyone who borrowed in the last few years can currently afford loan repayment in addition to gas, groceries, and rent.
However, it's not all bad news. Looking at the current job market, we are seeing record numbers of people working, and often working one or two jobs, or a day job and gig economy or online side hustle or two. The workforce is extremely well-utilized right now, which means that most people are making a steady income. While prices are high and delinquency may be rising, steady income is always a good sign for loan repayment.
The strong job market is also leading to higher wages, which will also help to repay debts.
Finally, it's worth considering that while there is a slide toward greater delinquency, returning delinquency rates have not yet outstripped pre-pandemic numbers. Considering that, during the pandemic, many debts were deferred and families had stimulus checks changing the economic balance, we may simply be seeing a return to normal market behaviors and within the margin of usual fluctuations.
Many lenders have chosen to lend to lower-income communities and grant loans to those with lower credit scores. This can be an enriching choice, providing opportunities to workers and families who are building their credit scores and financial prospects. Of course, during times when all low-income households are hit hard by increased costs, low-income and low-credit lenders must also make plans to protect their operations during tough times.
Considering that many delinquent accounts may be working people who would prefer to pay their bills, offering understanding payment plans and even payment deferment plans can keep these accounts from being charged off. Clients may pay you in smaller installments, and you can also leave them the flexibility to return to full payments when the cost of groceries, gas, and housing improves.
While you may have a limited budget to offer this kind of flexibility, you can also keep on loyal and typically responsible clients by adapting to the financial circumstances they are subject to.
You can also accelerate your cash flow and ease the financial servicing requirements of your portfolio by selling your nonperforming loans. If you have loans that have not or are unlikely to respond to payment plan solutions consider selling these nonperforming loans. Not only will you benefit from the immediate income increase, but you can also allow your own limited internal staff to focus on the front-end lending part of your business and assist customers in continuing their payments before accounts become delinquent or charged off.
Garnet is a leader in selling distressed assets in a regulation-compliant manner. We specialize in the trading of loans, and selling loans is especially complex to do in a way that is transparent, compliant, and enticing for currently cautions loan investors. Garnet brings experience to the table and history in the market that speaks for itself.
If you are ready to sell nonperforming loans in order to accelerate cash and ease servicing burdens, Garnet is here to help. Reach out to consult with us on your portfolio.