While a sturdy job market is giving a sense of security and optimism to American employees, it is not the sole reason for the increase in borrowing.
The stagnation in wages; fall in gas prices and the considerable increase in home equity loans, all are contributing factors to the rise in demand for loans. Secured personal loans, auto loans, home loans, loans for luxury items like furniture or boats, all are expected to relish bigger demand this year.
Secured loan numbers
Trans Union expects average secured personal loan balances to increase to $17,904 up from $17,411 at the end of 2015, with the volume of secured loans increasing by 3%. In addition to forecasting a rise in demand for private loans, Trans Union expects no change in default rate in 2016. Of the 13.6 million customers who had a secured loan balance as of the third quarter of 2015, 7.13 million were within the prime and higher risk tiers and 3.34 million were within the subprime risk tier.
According to Real Trac statistics in 2015, 1.08 million U.S. properties had foreclosure filings on them. These filings cover default notices, regular auctions, and bank repossession, and are down 3% from 2014. In 2015, a total of 449,900 properties were repossessed by the lender, up 38 percent from 2014. Average price for the bank owned homes in 2015 was down by 41% below the average price of all homes, which is the biggest discount on bank-owned houses since 2006. The foreclosure process in 4th quarter took 629 days on average as compared to 630 days in 3rd quarter, but this number was still 4 % more than what it was in the 4th quarter of 2014.
US auto loans have touched the $1 Trillion mark in total size recently and there are concerns of a sub-prime auto lending bubble in the market. The size of an average auto loan is more than $30,000. An industry report released by Transunion (image below) documents the slide in lending standards with 11 basis points increase in average delinquency from 1% in q2 2015 to 1.11% in Q2 2016. The average auto loan balance has also grown by 2.7% during the period.
Along with the delinquency rates, it is important to understand how the collateral is monetized by the lender and what kind of recovery rates are achieved on repossession. If a client defaults on a home equity loan or a home equity line of credit, the lender can foreclose the house. While the process varies from state to state, but generally default begins after no payment is made for 150 days. Although foreclosure normally takes 2 to 18 months, some foreclosures can take two years or more.
Secured loans are not always secured
Similarly, if someone defaults on their automobile loan, banks take the ownership of their vehicle. Most banks will first issue a notice to a client in default; usually, the allotted time period is seven days, in which they can make good on their payment. If they cannot meet the deadline or renegotiate their loan terms, the lender can petition a court for a permit to repossess the vehicle.
After the bank repossesses the property, it usually takes 3 to 6 months, before the lender can put an REO property on the market. This blocks their capital acts as a huge drag on growth. Lenders are not experienced in maintenance and repair; so they hire professionals to maintain the properties, which again cost money.
This has led to a scenario of “Bank walk-aways”; a situation where banks do not foreclose because the collateral is so underwater that the proceeds from a sale would not be enough to cover the transaction costs of implementing the foreclosure itself. In Oakland County, 27% of foreclosures in the last 5 years were categorized as walk-aways by a news report. Secured loans don’t seem secure anymore!
Secured loans in p2p
On the other side, in the p2p lending industry, the decline in the rate of returns, increase in default rates and saturation in unsecured loan markets have pushed fintech lenders into entering the secured loan segment.
Companies like Realtymogul, Patchofland, Driveup, Zopa.com, etc have started lending against property, cars, gold and other physical collateral. This may entice the investors who might have burnt their hands at unsecured lending; believing that secured lending will ensure protection from capital loss. But it is vital that start-ups understand the existing scenario of secured lending in America and have processes in place to ensure that collaterals can be repossessed and monetized on a feasible basis.
The start-ups will need to rely on many external vendors for enforcing repossession, auctions etc. It is here that the lender needs to be sure that the company itself and its vendors are fully compliant with all the relevant federal and state laws.
Complytrac is one of the leaders in the space and its partnership with alternative credit data giant-Microbilt has given it a powerful platform to attract fintech clients. Microbilt also has multiple products which are being used by lenders to ensure that secured loans are actually secure. Its ID verification and background screening tools are considered by experts to be amongst the top solutions in the industry. It’s SmartTrac, Property Search report, SPOT verified place of employment, Trace details, and other services have become the standard in the marketplace. Though there have been many launches in this space, Microbilt continues to hold its leadership position due to the staggering data at its disposal. Its alternative credit data points are 3 times more than the combined alternate data of the three largest consumer credit agencies.
Transition from unsecured to secured
Secured lending is a welcome extension for the p2p lending industry which had earlier exclusively focused on unsecured consumer and business lending. Secured lending will allow risk-averse lenders to join the marketplace lending platform for investing and generating superior returns. But secured lending brings its own set of headaches for young start-ups. Compliance needs to be top notch especially during repossession, auction etc. Credit analysis and fraud detection will still play an extremely important role in ensuring that the lenders are not taken for a ride. Investing in the top of the line solutions for combating defaults and ensuring compliance is not a question of choice anymore for young fintech start-ups, but necessary for survival.
Author: Heena Dhir and George Popescu