Preview: Complex bonds tied to consumer loans, buoyed by a savings surge, are one of the year’s top-performing investments. Investors who bet U.S. consumers would keep paying debts this year are reaping a windfall as households spend less and save more against the backdrop of a still-ailing national economy.
Prodigal’s Take: By Oct 2020, the fiscal stimulus package had an outsized positive impact on the U.S. consumer. This enabled consumer ABS bonds, fixed income instruments that collateralize consumer loans, to return 10% from January to October 2020. US household economy was relatively overleveraged by the end of 2019 and when the coronavirus pandemic hit, the consumer ABS market took a nose-dive and consumer financing firms like LendingClub were hit hard on Wall Street.
However, the US consumer proved resilient, thanks to the CARES Act and other stimulus measures, extra household cash was diverted towards repaying loans. Even though fiscal support expired in September 2020 consumer delinquencies didn’t rise.
Preview: The average credit score hit a record in July after millions of Americans had lost their jobs, scrambling lenders’ underwriting models. While the coronavirus was pummeling the U.S. economy, Americans’ credit scores—a metric used in nearly every consumer-lending decision—were rising. The average FICO credit score stood at 711 in July, up from 708 in April and 706 a year earlier, according to Fair Isaac Corp.
Prodigal’s Take: In the midst of a raging pandemic, as unemployment rose and Americans faced economic hardship, surprisingly the credit scores across the board rose. The increase in average credit scores as reported by FICO and other bureaus can largely be attributed to the massive and timely government stimulus. As consumer spending trended lower, borrowers smartly used the excess cash to pay down debts.
During previous downturns, most notably 2008-09 financial crisis, loan delinquencies typically rose as more Americans were left unemployed and missed their monthly payments. The resilience of American borrowers during the early months of the coronavirus pandemic was of historic proportions and unprecedented. Lenders have been forced to employ alternative methods to evaluate creditworthiness. Current cash payments can be a lagging indicator while unemployment was still high amidst the uncertainty of further fiscal stimulus.
Banks and consumer lending institutions were well-positioned to withstand the initial shock, however, further sluggish economic activity can derail the stability in credit markets. The incoming Biden administration has promised large-scale stimulus which will be crucial to maintain the strength of the U.S. economy and consumers in particular.
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Preview: Once federal benefits dry up, highly indebted consumers could be forced to file. American households had more debt than ever when the pandemic sent unemployment soaring in spring 2020. But bankruptcy statistics did not reflect the struggle to manage that debt; personal bankruptcy filings are in sharp decline.
Prodigal’s Take: By spring 2020, as most of the US went into a massive lockdown and shelter-in-place orders, unemployment soared and paychecks effectively stopped.The federal government’s stimulus package starting April avoided bankruptcies and missed debt payments.
With uncertainty around the further federal stimulus, banks started preparing for the worst and credit limits were reduced. Borrowers’ unease was evident through the rise in the CFPB database complaints count as the nation’s biggest lenders were gearing for a wave of delinquencies from mortgages to monthly credit card payments.
However, the pandemic forced households to bring their finances under control and used the $600 weekly unemployment benefits to repay existing debt. Borrowers were able to avoid calls from debt collectors in 2020, but the outlook for 2021 hinges on quick economic recovery and additional planned stimulus from the Biden administration.
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