The FinTech Debt Bubble and the working poor

A couple weeks ago Reuters published a surprisingly good article about the fragile and unsustainable state of our economy.

A Reuters analysis of U.S. household data shows that the bottom 60 percent of income-earners have accounted for most of the rise in spending over the past two years even as the their finances worsened - a break with a decades-old trend where the top 40 percent had primarily fueled consumption growth.
...The data shows the rise in median expenditures has outpaced before-tax income for the lower 40 percent of earners in the five years to mid-2017 while the upper half has increased its financial cushion, deepening income disparities.
...A hot job market and other signs of economic health encourage rich and poor alike to spend more, but tepid wage growth for many middle-class and lower-income Americans means they need to dip into their savings and borrow more to do that.

This is not a good trend. Poor people dipping into savings while their wages are stagnant is not something that can last for long.
And that's just the start of the bad news.
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The bottom 40 percent of households in the United States have an average net pre-tax income of negative $11,660 a year, according to a new report by Reuters.
The report’s data shows that the bottom two quintiles of households make, on average, $11,587 and $29,414 a year in pre-tax income, respectively. Their expenses, meanwhile, are $26,144 and $38,187, respectively. This means that the bottom quintile has an average net loss of $14,557 a year and the next quintile a loss of $8,773, prior to taxes.
...The data covers students, who are taking on student debt, and recipients of food stamps and federal benefits, who may receive small sums to help pay for expenses. However, the bottom 40 percent of households is overwhelmingly composed of low-wage workers, who, despite their immense sacrifices, are unable to cover the basic cost of living.

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As bad as this sounds, the most disturbing parts is a) this is happening very late in the business cycle, when unemployment is still low, b) this is happening when interest rates have begun to rise, and c) this is such a huge percentage of the population.
All of these things point toward a recession happening soon, and the working class being absolutely crushed.

It leaves only one question: who is it that is doing all this lending to the working poor at the worst time? (i.e. who will be asking for a taxpayer bailout in a year or two?)
Those guys are known as FinTech.

Ten years on from the credit crisis, Americans are again piling on debt in all its varieties, from credit cards to student loans to mortgages. These days, personal loans—a category turbocharged by fintech upstarts—are growing especially quickly. With an increasing number of shaky borrowers taking on this debt, the risks are growing for lenders during the next economic downturn.

The stock of personal loans outstanding has grown to about $120 billion as of March, according to TransUnion data. That compares with $71.9 billion a decade ago—worth around $90 billion adjusted for inflation—when the subprime mortgage crisis crescendoed.
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Upstart financial technology companies like Lending Club, Prosper, and Avant account for about a third of this lending, up from less than 1% in 2010.

Until recently, personal loans were mainly used by borrowers with poor credit who may not have had access to credit cards or home equity loans, according to Jason Laky, TransUnion’s consumer-lending business lead.

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If you're thinking "I've never heard of these guys before" then consider who backs them.

Goldman Sachs has jumped in with its Marcus online bank, which the Wall Street stalwart introduced in 2016. Goldman says Marcus has more than 1.5 million customers and has originated more than $4 billion in consumer loans since it launched.
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The Aspie Corner's picture

And all because the pigs refuse to hire unless you have a Bachelor's degree, 20 years experience, a drivers' license, a perfect credit score, etc. The glass floor will never be broken and no one's listening.

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@The Aspie Corner more debt

Of the more than 40 million Americans who have student debt, 5.9 million—about 14% of the total group—owe more than $50,000. That’s nearly triple the percentage who owed that amount in 2000, and it’s a share that’s continuing to grow: Among one of the most recent cohorts, the group of borrowers who entered repayment in 2014, nearly 18% owed more than $50,000.
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And while defaults among high-balance borrowers are rare, so is paying down the debt. Large-balance borrowers overall are paying down their debts more slowly; for the first time, the authors found recent borrowers in the group actually owe more than their initial repayment amount. The median large-balance borrower from 2010 owes about 5% more on their debt now than when they left school.
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Historically, borrowers with large debt balances were mostly graduate students—considered a safe lending bet because they tend to earn incomes high enough to pay off those loans. But today, the Brookings report finds, the individuals who have balances greater than $50,000 are increasingly adult undergraduate students, parents, and students attending for-profit colleges. The share of borrowers taking out more than $50,000 in parent loans increased from 6% to 16% between 2000 and 2014, while the share of borrowers with $50,000-plus balances who attended a for-profit graduate degree program increased from 5% to 15%.

That shift in borrower profile is problematic, the authors say, because neither group is as well equipped to repay its jumbo loans: Students at for-profit colleges have lower job market outcomes, and parents don’t receive an earnings boost or job stability from their child’s degree.

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divineorder's picture

@gjohnsit to continue. We really had it wonderful compared to this back in the day.

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A truth of the nuclear age/climate change: we can no longer have endless war and survive on this planet. Oh sh*t.

karl pearson's picture

Saw this recently in Wall Street on Parade

Against that backdrop, the Office of the Comptroller of the Currency (OCC) announced on Tuesday that financial technology companies, known as fintech, which provide various types of banking activities other than accepting insured deposits, will now be allowed to apply for a special purpose national bank charter and operate across state lines. The OCC announcement promptly followed a report from the U.S. Treasury which recommended that the OCC make the charter available.
The immediate impact of gaining such a charter would be that online lenders who now must abide by state by state limits on the amount of interest they can charge on a loan to consumers would be unleashed to fully channel their predatory lending instincts.

The head of the Office of the Comptroller of the Currency (OCC) Joseph Otting and the Treasury Secretary Steve Mnuchin were top executives at OneWest, the old IndyMac. IndyMac bank failed in 2008 and was seized by FDIC. This will not end well.

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@karl pearson
is another guy from Goldman-Sachs

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