Garnet Capital Advisors Blog

Financial institutions that have been sitting on the sidelines with loan portfolios waiting for an interest rate decrease should reconsider and get in the game now.

All indicators point to the Fed holding interest rates steady for at least most of the rest of this year to battle stubborn inflation that won't quite fall to the target rate of 2 percent.

With the uncertainty that always accompanies a presidential election year, now would be the ideal time to get those loan portfolios in the market, as buyers are looking for solid options.

The Interest Rate Picture

This month's announcement that the Fed would hold its benchmark rate steady in the 5.25-5.5 percent range came as no surprise. With inflation ticking up a bit since the beginning of the year, Fed officials made clear that no interest rate cuts were in the cards in the near term.

Even before the latest announcement, Fed governors warned markets, economists, and consumers that higher interest rates would likely be in the cards for the long term.

Minneapolis Fed President Neel Kashkari shocked the stock markets a bit when he stated in April, "If we continue to see inflation moving sideways, then that would make me question whether we need to do those rate cuts at all."

Richmond Fed President Thomas Barkin showed a little more reserve when he said the Federal Reserve has "time for the clouds to clear" before making changes to monetary policy.

Dallas Federal Reserve President Lorie Logan recently said that it's "just too early to think" about cutting interest rates, even suggesting that rates might not be high enough to dampen consumer spending and ease inflation pressures.

Interest Rate Hikes Slow to Hit Consumers

A recent report shows Americans are spending only 9.8 percent of their after-tax income on interest and principal on the debt, up only slightly from the 9.5 percent they spent two years earlier before the Fed began hiking rates. This is largely a result of homeowners locking in historically low mortgage rates during the pandemic and not taking on other large consumer debts, such as new vehicles.

"What you have right now is a situation where these high rates aren't generating more braking power on the economy," says Joseph Lupton, global economist at J.P. Morgan.

Opening in the Loan Market

With the prospect of an interest rate decrease seeming unlikely, the ABS (Assets Backed Securities) market has seen an explosion this year, leading to eroded yields in that sector and creating a potential opportunity for whole loans. SIFMA Research has tracked $131.9 billion in issuance in the ABS market through April, representing a significant 44 percent increase compared to the previous year.

At least 10 issuers (auto companies) were planning to dump another $9 billion into the ABS market in mid-May before the release of the latest inflation figures. As the threat of defaults begins to creep from the subprime to the prime market, these loan packages will become less attractive to buyers.

Lock In Profits: Capitalize on Selling Loans Now

Investors and financial institutions looking for loan portfolios to purchase prefer to have more options when looking to balance their assets. Loan sellers with other types of loans who have been waiting for Fed action on lowering interest rates might have their best opportunity to cash out at this point rather than risk taking greater losses as higher interest rates linger.

Garnet Capital Advisors connects buyers and sellers to work to each's advantage and ensures that all loan portfolio sales meet stringent regulations. If you would like to discuss the loan portfolios you have ready for sale, contact our experts to discuss the best options for finding the right buyer. We also are interested in hearing from more financial institutions in the market to buy loans to balance out their books.