Garnet Capital Advisors Blog

EXCERPT: It might be impossible to predict the future with complete accuracy, but based on some of the obstacles faced by the lending industry in 2016, 2017 might realize its own set of pitfalls.

2017 is poised to experience a number of potential pitfalls in the lending industry, including a drying mortgage segment and shaky subprime auto loans.

It's not uncommon for a slew of predictions to surface at the start of a new year, regardless of the niche. When it comes to the lending industry, 2017 is expected to come with a few snags. The year before experienced its own set of pitfalls, including a spike in delinquency rates on risky auto loans and turbulence in the alternative lending realm.

When it comes to the concerns of 2017 in terms of lending, there are a few specific areas of concern that stand out.

Subprime Auto Loans

Last year saw a rise in delinquency rates as a result of a jump in subprime auto loan originations, and this issue is likely to continue this year. With the rise in the number of subprime auto loans came a subsequent increase in delinquency rates, which in late 2016, reached the highest level since 2010, and has even mimicked the trend that was seen during months leading up to the 2008 recession.

As the financial system has been recovering, subprime auto loans have come in strong. The number of new auto loans made to borrowers with credit scores less than 660 almost tripled since 2009. In fact, roughly $50 billion of auto loans went to these borrowers each quarter in 2016.

The rate of 90-day delinquencies for subprime auto loans made to those with lower credit scores continues to increase. According to the New York Federal Reserve, about six million borrowers with sub-par credit scores are at least 90 days late on their auto loan payments.

Non-bank auto finance firms are the main source of the most subprime loans, while delinquency rates for auto loans originated by banks and credit unions have improved slightly. However, such lending institutions still have high subprime auto loan exposure, putting them in a position to take measures to tread lightly within this realm.

Mortgages

We've been immersed in a historically low-interest rate environment for years, and home buyers have been taking advantage of that fact. However, with the Federal Reserve's recent increase in the benchmark rate, it's expected that the number of mortgages originating in 2017 will start to slow down. The Federal Open Market Committee (FOMC) has implicated that there may be a couple more increases in 2017.

The mortgage industry may start to dry up in 2017 as interest rates are anticipated to rise.

While mortgage rates aren't directly linked to the short-term benchmark rate, such increases could still affect the mortgage lending industry this year. After the Fed increased the rate by 0.25 percent in late 2015, a one-point increase in the interest rate for 30-year, fixed-rate mortgages occurred, which then caused a drop in home loan applications. Mortgage lenders will need to handle interest rate increases with prudence.

In 2017, mortgage lending will be driven by the strength of new home sales. Yet with an anticipation of another interest rate hike and the potential for the new Trump administration to cut back on mortgage interest deductions when filing taxes, 2017 could potentially see mortgages start to dry up.

Student Loans

Americans are stuck with nearly $1.3 trillion in student loan debt. The average graduate from 2016 owes more than $37,000 in student loans, a 6 percent increase from the year before. Even older students are experiencing more student debt. In fact, students aged 60 and older are the fastest-growing pool of student loan borrowers. Today, approximately 2.8 million Americans in this age demographic have at least one student loan.

With such a huge amount of student debt in the U.S., consumers are increasingly being faced with financial struggle. As a result, investors believe that the government will exit the student loan business, which would open the doors for banks and credit unions to take advantage in the private student loan market.

Avoiding Trouble in the Lending Realm With the Help of Loan Sale Advisors

While 2017 may be positioned to experience a number of potential concerns in the lending realm, financial organizations can still avoid trouble if they use a seasoned loan sale advisor when buying and selling loans.

With consumer debt on the rise, lenders must be very cautious as far as what they choose to buy and sell. Assessing profitability and risk while maintaining compliance with stringent regulations is a potentially complex process that should only be approached with the assistance of a seasoned loan sale advisor like Garnet Capital.

For more information about the value of Garnet Capital's valuation services in the lending industry, sign up for our newsletter today.