ABS must tread lightly as easy money ends
Last quarter’s 3.2% US GDP growth estimates point to growing confidence in the world’s largest economy and is a sign that the era of the low rates and low growth may be drawing to a close.
Data from the US Department of Commerce showed that consumer spending was the main driver behind the revised figure, pointing to greater confidence in the economy.
US consumers are eager to spend again and lenders are all too happy to give them the means to do so. With the consumer finance arms of the big banks churning out new debt, and new entrants like marketplace lenders looking to tap into consumers’ demand for credit, the securitization markets could be flush with unsecured consumer paper in the coming year.
But with economic growth comes the spectre of rising interest rates and higher financing costs. The market is predicting as many as five interest rate increases between now and the end of 2018. This will include a 25bp rise in December, which almost all observers now see as a certainty.
As US consumers find it more difficult to refinance or take out new loans at historically low rates, defaults could rise, and unsecured lending is most at risk. As the debt is not tied to a hard asset, these loans are usually a lower priority for consumers than their mortgages or car payments.
The consumer credit and online lending providers need to avoid falling into the same trap as the mortgage market did in the pre-crisis days. Lenders should show restraint in the face of soaring demand for credit at a time when rates are going up and borrowers’ ability to repay is stretched.
The same goes for lenders in the subprime auto market, which S&P Global Ratings highlighted in October as a market that is seeing a wave of new defaults, observing the highest rate of new 60+ day delinquencies since 2010.
Total consumer debt, which includes home mortgages, auto loans, student loans and credit card debt, stood at $12.3tr at the end of the second quarter, according to data from the Federal Reserve Bank of New York.
While December's single 25bp rise will only have a modest effect on most households, the fairly ambitious spending plan posited by president-elect Donald Trump could drive rates up at a quicker pace. Consumers will adapt to a slow march away from easy money, but if rates rise fast and hard the shock to borrowers could hurt badly.
The ABS market needs to take the good with the less so, and look at rising confidence in the economy in the wider context of the end of an era. While booming consumer spending should drive booming volumes in the securitization market, originators must take heed of history and tread lightly in their lending.