“The stock market is a device for transferring money from the impatient to the patient.” – Warren Buffett
It’s human nature to want to cut and run when stock market values start dropping. When markets are on the climb, people are eager to participate, but feel real loss when unrealized gains take a dip. This reaction is understandable; you’re not alone if you question whether or not your stock market investments will yield long-term gains for you when the economy shifts and uncertainty rises.
When you see your stocks or 401K dropping in value it can be easy to overreact in a way that is detrimental to your long-term interests. But we can learn from those who act impulsively — 66% of investors report regret of impulsive or emotional investing decisions!
What does maintaining a stock portfolio have to have to do with maintaining a strong loan portfolio? Well, when you apply Buffet’s maxim to the performance of your CPI program in today’s economic environment, the same principle applies: An economy with rapidly rising inflation and increasing debt is erosive to personal balance sheets.
In this kind of environment, which is the type we are experiencing currently, it’s likely you will see increased CPI activity in your loan portfolio — but that doesn’t mean your CPI program isn’t working. In fact, it means just the opposite — your CPI program is indicating there is a fundamental shift in your loan portfolio!
In more typical economic conditions, the proactive measures employed by high-quality providers keep friction to a minimum, while poorly designed or maintained portfolio protection programs can result in continuous borrower noise. However, an uptick in a well-run program's CPI activity is an early indication of external economic shifts. This reflects changes in the financial circumstances of your borrower base and indicates your loan portfolio is mirroring increased risk exposure.
In 2022 alone, prices for housing, transportation, fuel/energy, and food have increased by 15-50%. In order to compensate for these higher prices, consumers are looking for ways to stretch their dollars. While some might be able to make ends meet by reducing discretionary expenses, those without sufficient discretionary income are making hard choices.
One of the ways consumers may attempt to cut household expenses is by reducing their auto insurance coverage — and in some cases dropping their private insurance coverage entirely. In 2021 the Insurance Research Council reported that 1 in 8 drivers was uninsured, with some states seeing uninsured driver rates of 1 in 4 or even 1 in 3!
Many auto insurers have already started to submit state filings for increased rates. Bankrate shares data from S&P Global Market Intelligence that shows the average rate increase filing for auto insurance is about 4.9% this year. This is a direct result of inflation and the increased cost of car ownership, including the cost to repair and replace vehicles.
“In the past two years, we have seen an unprecedented increase in new and used auto prices, and lenders have reacted by increasing loan terms from 72 months to 84 months to even 96 months. Current economic actions are working to bring auto prices down, and when this happens, lenders will have auto loan portfolios with loan-to-values that are upside down, exposing them to much greater risk of loss” —John Pearson, EVP of Sales
The government’s stimulus checks have run out, as have the grace periods many financial institutions implemented at the beginning of the pandemic. Nearly a quarter of American households report no emergency savings. At the same time, many individuals have returned to work and are again bearing the costs of gas, transportation, childcare, and time needed to go into the office. Prices will continue to rise and as a result of this 43% of American consumers expect to add to their debt in the second half of the year.
With the state of our economy, an increasing number of consumers are actively choosing to reduce insurance coverage and will likely continue to make difficult financial choices over the coming months. This makes portfolio protection with robust tracking and proactive verification more necessary now than ever. When these measures are combined with a comprehensive multichannel notification system that reaches uninsured or underinsured borrowers early, and an insurance program that provides them with coverage, you can ensure both your loan portfolio and your borrowers will be protected.
Under these conditions, the comprehensive tracking and protection offered by State National provides greater benefit than ever, because the services we provide allow lenders to address borrower payment issues proactively. Tracking also gives you an early warning that a borrower’s credit may be slipping, which can be an early indicator of a borrower in distress. This gives you an opportunity to reach out and help them by offering additional support and guidance.
For borrowers who choose to reduce their private coverage or let their policy lapse, State National provides increased communication and activity on your behalf and, if necessary, allows you to insure their loans to protect your financial institution. Yet, State National’s comprehensive, proactive verification leaves your larger, compliant borrower population undisturbed.
And it’s not just uninsured or underinsured borrowers who are protected — these comprehensive measures serve to protect both those who are compliant and non-compliant, as well as your customer base as a whole. All of your customers benefit when your institution keeps losses to a minimum and protects insured borrowers from the consequence of uninsured ones — because when lenders have to increase their interest rates to cover the increasing charge-offs for uninsured borrowers, all borrowers pay more.
Rising interest rates also make the lender less competitive in the marketplace and fewer loans means less interest income to offset losses. At low levels, this isn’t an issue, but in high-loss environments it can create a downward spiral, where fewer loans lead to higher interest rates, which leads to fewer loans…
State National has pioneered a culture of continuous improvement for the past half century. Our unwavering commitment to investment in technology and service delivery helps ensure we have the ability to best serve our partners in both good times and challenging times, and we can help your business weather any economic storm.
“The key to everything is patience. You get the chicken by hatching the egg, not by smashing it.” – Arnold H. Glasgow
So remember — when times seem uncertain and it’s tempting to make short-term decisions that won’t pay off in the long run, the best thing you can do to keep your loan portfolio’s collateral and borrowers protected is to stay the course and think big picture. Keep in mind that all providers must deal with the same economic factors; those offering less-specialized, lower-quality programs not only won’t escape today’s inflationary effects, they’ll be hit even harder by them — which means so will your financial institution.
Protect your loan collateral and your borrowers in the smartest and most thorough way possible by maintaining a reliable, transparent CPI program with the only provider who has specialized in guiding lenders through times of economic volatility for half a century — State National Companies.
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