Economic Waves in Motion: Understanding Rising Lender Risk

Examining the Ongoing Ripple Effect of Supply Chain Disruption, Inflation, and Interest Rates Picture the economy as a large lake, with all the economic players and stakeholders being boats on the water. Back in 2020, Covid-19 was the reckless jerk in the speedboat who just ripped across the water without regard to anything or anyone else. Anyone who’s been a recipient of the aftermath of reckless speedboat guy knows there will be many waves that follow in his wake. Depending on your distance and the size of your own boat, these waves may threaten to swamp your craft or they may just be mild ripples in the normally calm water (hey, it’s my analogy). In addition, the direction your boat is situated, or your vector should you be underway, will also change the way your boat experiences the wake. All that is to say that there isn’t a one-size-fits-all answer to how you will be affected by the waves. In our economy, just like on the water, major disruptions are not over right after the trouble has passed by. In our current “economic lake,” there are three distinct waves that have been created by the “speedboat” of our global pandemic. Wave One – Supply Chain Disruption With the onset of Covid-19 and the shutting down of manufacturing and limiting of on-site work to “essential” personnel, the auto market changed quickly. We went from a market where car manufacturers and dealers were begging the public to buy their inventory through heavily discounted prices to a situation where the prolonged chip shortage and lack of manufacturing created empty lots and not enough vehicles to go around. As any good student of economics can tell you, the lack of supply and the excess of demand leads to higher prices. Credit unions outperformed other financial institutions in this market, and while new car loans were a bit more scarce, the higher prices of used cars more than made up for the difference. But another ripple caused by Wave One is what car manufacturers were doing with the limited supply of chips they did have. They focused production on their high-end, higher-margin vehicles, which made them a lot of money. Unfortunately, as a result it created a market gap where literally (literally) millions of low-cost vehicles that would have otherwise been manufactured simply don’t exist today. The impact of this missing category has just now begun to be felt in the used car market. Low-cost vehicles that we would now expect to see being traded in for new cars are just not widely available in the used car market. Those that do exist move at a high speed, staying on the market in some cases only hours. What’s a used car buyer to do? They must wait for those nicer, high-end cars to hit the market at a price they can afford, which may mean another year or two before buying. In addition, the buyer who purchased that high-end car during the pandemic is likely to hang on to it a year or two longer to get more value from the price they paid. Manufacturers are slowly bringing back production of low-cost vehicles, but it will be years before this wave and the following ripples work their way through the economic landscape (waterscape?). Wave Two – Inflation As stimulus money inflated bank accounts and drove down consumer debt, and as businesses closed or limited hours, people had money to buy goods and services but limited places to spend it. More money chasing goods and services created a perfect environment for inflation to start to spiral. Groceries, energy, and cars all took significant jumps — and housing prices, especially, escalated steeply. During the height of the run-up, in many places, when selling a house it was not uncommon to get multiple cash offers for significantly more than list price in a matter of days. Renters also felt (and still feel) the bite of inflation as their leases renew at significantly higher rates. As inflation continues to be an issue, many households have moved from having to decide how to spend their extra dollars to instead having to decide which bills will get those dollars. As a result, lenders are back in the full swing of collections as delinquencies rise. Unfortunately for lenders, an increasing delinquency rate can move quickly into increased charge-offs. The inflation wave is just now being felt in the lender space and the expectation is that 2023-2024 will be challenging to the bottom lines of many lenders. Staffing shortages combined with salary inflation, combined with more demand for repossession, skip tracing, and remarketing services than market supply currently provides, leads to anecdotal stories of lenders spending extra money to have their vehicles bumped in priority so they won’t be left out. It doesn’t take long for all of these forces to combine to create a new higher price point for everyone — and so inflation continues. Wave Three – Interest Rates In the bid to combat inflation, the Federal Reserve has continued to raise interest rates. Rates climbed steeply from 3.25% to (at the time of this writing) 8.00% in the space of less than a year. While the rate of increase has started to taper off, the impact is undeniably being felt in many areas. In the housing market, lending has cooled significantly as: Refinance activity has virtually dried up. Inflated home prices plus significantly higher mortgage rates have priced many buyers out of the market altogether. Similarly, in the auto market: Buyers who would normally trade in their vehicles for a new one are looking at either a huge increase in the monthly payment amount or a one- to two-year extended term on the note. Many of those buyers are deciding to hang on the vehicle they have. For those borrowers who do take the plunge, even small changes in their economic reality could lead to delinquencies, defaults and repossessions — making the risk much higher for their lenders. Historically, the labor market has to tighten significantly in order to rein in inflation. That hasn’t happened yet. The Fed is being cautious in an attempt to not make that a reality, but it remains to be seen. The impact of this wave has shifted the water line, but stay tuned for more turbulence. Naturally, all boats aren’t the same size, the same design, or heading in the same direction. Each lender has to examine their own unique boat to determine the best way to position it to ride out the waves and hopefully return to calmer waters — at least until the next jerk in a speedboat comes along to stir things up. For a personalized consultation regarding ways we can help your financial institution ride out this storm with reduced risk, reduced charge-offs, and greater peace of mind, contact our CPI experts.

Rising Auto Delinquencies, Higher Charge-Off Risk, and What You Can Do to Protect Your Loan Portfolio

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Despite Inflation, You Can Still Maintain a Competitive Advantage and Protect Your Auto Loan Portfolio Spotlight Soundbite: The Value of Customized Portfolio Protection in the Subprime Auto Loan Market Borrowers Are Facing Financial Stress As everyone knows, in the past several years interest rates have soared and prices have inflated. Individuals across the economic spectrum are finding it harder to weather the expenses of everyday life — groceries, housing, transportation, childcare, and all the others. While buy now and pay later programs may offer temporary relief, borrowers will ultimately not be able to put off making tough decisions about where to spend and save. Unfortunately, a growing number of auto loan borrowers, and especially subprime borrowers, are choosing to drop or reduce their auto insurance coverage as a result of having to decide which bills to pay with their increasingly stretched paychecks. And these uninsured or underinsured borrowers pose a threat to your institution’s loan portfolio and profitability. The news isn’t all grim, however — State National can help protect your financial institution from the risks posed by this group. How to Minimize Charge-offs Caused by Uninsured Borrowers Do you currently use an insurance tracking system to keep track of your borrowers’ coverage status in an attempt to prevent charge-offs? It’s a good start — tracking is a critical part of monitoring your institution’s risk exposure. However, having your staff track insurance in-house is a time-consuming and inefficient solution. More concerning, even if you employ an outside vendor to track coverage for you, studies show that tracking alone is not enough to encourage borrowers to keep their insurance in force. Without a consequence for remaining uninsured or underinsured, it’s been shown time and time again that a significant portion of borrowers, particularly in the non-prime and subprime space, simply will not heed warnings to bring their loans into compliance no matter how many letters or phone calls they get reminding them to do so. Without a mechanism that will actually change borrower behavior, tracking alone still leaves too much risk in your portfolio. A Persistent Problem — With an InsurTech Solution The good news is, you can more thoroughly protect your portfolio while also saving labor costs and freeing up your staff to perform other tasks to grow your business. And you can do it all easily, seamlessly, and with total peace of mind when it comes to compliance. Protecting collateral from loss is most definitely not the same as it was “in the old days” — or even just a few years ago. Advances in artificial intelligence, machine learning, and other leading-edge technology solutions have changed the game when it comes to mitigating the risk from uninsured borrowers. From software bots that can log in to insurer websites and update thousands of insurance statuses in seconds to nearly effortless multichannel borrower submission options including QR codes, email, text, web, and more, collateral protection problems of the past are simply not an issue today, especially with State National as your provider. As I like to say, “This isn’t your grandpa's CPI!” Save Time, Money, and Aggravation — What’s Not to Like? State National’s solutions provide tracking AND protect your portfolio. We also save your financial institution time with seamless implementation and multi-option borrower insurance submission solutions. Even better, there’s InsurTrak – our custom-designed proprietary technology platform where you can view all program details in real-time with just a few clicks. Additionally, you can personalize your coverage around exactly what works best for your business. Whether you need a full-featured, comprehensive program, one that keeps costs at a minimum for borrowers, or something in between, State National can customize a program that best fits your needs. A Simple Solution for Reduced Risk and Increased Profitability We have heard from some financial institutions that they “have no charge-offs” because they planned and allotted for a certain amount of loss. But money lost is still money lost even if you budgeted for it! What if you could save your company hundreds of thousands of dollars this year? Well, you can! Let me show you how you can leverage State National’s advanced technology and more than 50 years of experience mitigating loss from uninsured borrowers to proactively protect your business against today’s unpredictable economy and the wave of charge-offs your financial institution may be facing soon. It’s not too late to protect your portfolio from what’s coming our way.

State National's Retreat Where Female Finance Executives Go to Network and Learn A 2021 report from CUNA indicated that 51% of CEOs at credit unions and 33% of credit union board members are female. Many organizations speak at length about the value of empowering and providing opportunities to women — yet this recognition must be met with action. For example, Kim Sponem, CEO of Summit Credit Union, took action by starting The Red Shoes initiative. Filene Research Institute actively creates research reports about women in credit union leadership. These are just two of many examples across the credit union industry. Missions like these are an important part of transforming the narrative of women and finance. State National Companies also recognizes the unique leadership traits and skillsets that female leaders bring to the financial services industry. To celebrate those traits and provide women leaders from across the country the opportunity to build relationships with their peers, we created our own initiative — an annual event called the Female Executive Networking (FEN) Retreat. Why a Retreat Specifically for Female Executives? The goal of this annual retreat is multifold: Provide valuable, meaningful, and actionable education, information, and resources to senior credit unions and financial institutions executives that they can use to move their organizations forward. Create a forum for financial institution leaders from across the country to share best practices regarding leadership, retention, business growth, and operational excellence. Provide a rich and rewarding experience that organically allows connections and relationships to grow. Empower and inspire attendees to return to their financial institutions re-energized, with new ideas for accelerating the growth of their organizations. With these goals in mind, we launched our first FEN retreat in early 2020. And, oh, how critical it was for the female leaders who participated in this first event to achieve these goals — because at the time we didn’t realize were heading home to nearly two years of quarantine and isolation! A Most Welcome Return In 2021, after waiting 18 months from our launch date, we were more than eager to resume some sense of normalcy and held our second FEN Retreat. That year’s event featured Terri Trespicio, speaker, coach, and best-selling author of Unfollow Your Passion, as our keynote speaker and workshop leader. This year, our 2022 keynote workshop, titled How Macroeconomic Conditions Will Affect Your Financial Institution, Your Customers, and Your Household, was led by Marlena Lee, Ph.D., Global Head of Investment Solutions at Dimensional Fund Advisors, and Mary Ellen Krueger, Director, Wealth Management and Partner at Aspiriant. Not only are these FEN retreats educational, inspirational, and just plain fun, we at State National are also proud of being a part of the movement to empower even more women to lead in moving the credit union mission forward. After all, studies show that more female executives in a C-suite role can improve both customer orientation and financial performance. That’s a win-win-win — for credit unions, for their members, and for women in financial leadership. If you are interested in learning more about State National’s Female Executive Networking retreat, please contact your State National Client Executive or Regional Vice President. Comments from FEN attendees: