Mike Ginsberg's Musings: Developing Trends for ARM Professionals

Mike Ginsberg

Happy Tax Day! To continue this week on an informative note for ARM professionals, I will take a look at three important trends developing. Be on the lookout for our Q1 report which will be made available shortly and will contain valuable information about developing M&A trends and the regulatory climate.

Unemployment Rate Reduction Remains a Mixed Bag

The slightly lower March unemployment rate of 8.2% is mainly due to the reduction in the labor force participation rate. The current participation rate, 63.8%, is 2.2% lower than the pre-Obama administration period which means that 5.3 million people have dropped out of the labor force over the past 3 ½ years. If the Bureau of Labor Statistics were to count these people as employed, the unemployment rate would jump up to a whopping 11.6%.

For ARM professionals, the unemployment rate remains the single most important lead indicator for forecasting improvements in collectability. Understanding the real numbers will help project more accurate performance levels.

Brace Yourself for More Student Loan Scrutiny

It has been roughly two years since the federal government stopped subsidizing private lenders, effectively taking over the student loan market. As a result, fewer and fewer private lenders exist in a significantly smaller and dwindling market. Banks originated $7-8 billion in private loans last year, down from a peak of $22 billion in 2006.

Some of the biggest players have sold, shuttered or reduced their student loan businesses. Those who remain in the game are facing intense CFPB scrutiny over increasing default rates and escalating debt levels. Dominant players include Wells Fargo and Sallie Mae. Discover Financial Services is also a contender in the private lending space and some new players are looking to enter this space to diversify their holdings. All participants are waiting to see how regulators reshape the market yet again.

The CFPB’s report due in July on lender practices and some politicians’ moves to allow loans to be discharged in bankruptcy are sure to create quite a stir. Also, earlier this year, President Obama announced plans to expand the Perkins loan program from $1 billion to $8 billion, which matches the entire private lending business but at lower costs to students. ARM companies should continue to expect increased placement volumes into the foreseeable future, and dramatic regulatory changes are highly unlikely until well past the upcoming Presidential election and will not happen without significant resistance from strong bank lobbying groups.

Auto Deficiencies – A Growth Market for ARM companies?

Automotive loan originations are up more than 20% each of the past three years according to the active lenders focused on the space. With home equity down, personal lending still restricted, credit cards downsized as consumers paid down debt, and bank fees under the microscope, there are simply few bright spots for lenders to focus their resources.

Auto delinquencies tend to be low and they are secure, however consumers are increasingly seeking bank financing to purchase new and used cars since the drop-off during the great recession. Banks accounted for approximately 40% of car financings in Q4 2011, mostly to the buyers with super-prime credit ratings.

Increased competition among banks and non-bank lenders is driving down interest rates on auto loans and squeezing profit margins. As a result, expect to see increased loan originations to remain competitive. Deficiencies will follow. This bodes well for ARM companies servicing creditors that originate these loans or debt buyers that purchase these accounts.