Mark Hauser Shares Insights on the Credit Markets’ Current Status and Significant Challenges

Experienced finance leader Mark Hauser knows the United States’ credit markets continue to be a complex web of interrelated variables.

Submarket trends, large-scale economic conditions, regulatory issues, and other factors can influence the markets’ health and volatility.

With this as a backdrop, private equity principal Mark Hauser discusses the credit markets’ aggregate performance in 2021 Q4. He also highlights the outlook for 2022 and notes several factors that could hinder the credit markets’ expansion.

Credit Markets See Positive 2021 Wrap-up

During much of the COVID-19 pandemic, lenders implemented stricter lending practices. These policies reflected large-scale concerns about cash-strapped borrowers’ ability to repay these debts.

In 2022 Q1, Mark Hauser remarks that lenders appear to have relaxed their rigorous lending standards. To illustrate, the Transunion 2021 Q4 Quarterly Credit Industry Insights Report indicated that lenders were accelerating new account originations in the market’s non-prime segment.

This substantial increase in new accounts likely resulted from positive consumer credit results across several market segments. In fact, accounts established during the 2020 pandemic still exhibit equal (or better) 12-month performance compared to similar accounts originated in 2018 and 2019.  

Reduced Serious Delinquency Rates

Even though account delinquencies have recently begun to rise, substantial delinquency rates are still near (or even below) pre-pandemic numbers. This development is significant given that most forbearance programs have expired, leaving borrowers without a safety net.

Not surprisingly, this development has continued to spur lender confidence and led to higher credit approval numbers. Charlie Wise, TransUnion’s Senior Vice President of Research and Consulting, affirms this encouraging trend.

“Toward the end of 2021, the majority of accommodation programs expired, and lenders have seen consumers continue to perform well on their credit obligations. Lenders are eager to pursue growth, including expanding back into the non-prime consumer segment,” he explains.

Specific Market Sectors’ 2021 Q4 Performance

The Transunion 2021 Q4 Report highlights four major credit market segments’ performance. Each sector demonstrates positive results, although specific caveats are also in place. Hauser Private Equity’s Mark Hauser cautions that fluctuations in specific variables could lead to less-optimal outcomes.

The Credit Card Sector Sees Promising Gains

To compensate for consumers’ lower pandemic-era credit balances, card issuers have broadened credit access. In essence, the card-issuing banks are using this approach to enhance their overall growth.

To illustrate, the sector’s 2021 Q3 credit card account originations increased

 63.5% year-over-year. This development resulted in a record number of new accounts. Below-prime consumers accounted for almost 45% of these originations.

For perspective, a record 196 million consumers held a credit card in 2021 Q4. The average consumer credit card balance showed a marginal increase compared to the same 2020 period’s figure. However, both balances are still below pre-pandemic balance levels.

The Personal Loan Market Sees a Dramatic Recovery

The United States’ aggregate personal loan sector has seen an exceptional turnaround. In 2021 Q4, the market (including loan origination volumes) showed a return to pre-pandemic levels.

Borrowers’ balances also continued to grow. To illustrate, consumers’ aggregate personal loan balances reached a record $167 billion in 2021 Q4. Consumers’ willingness to take on additional debt resulted in almost 24% year-over-year growth in the average 2021 Q3 new account balance.

The Mortgage Sector Slows Down Amid Mixed Indicators

United States’ homebuyers’ motivation has recently begun to wane thanks to steadily rising mortgage interest rates. For perspective, mortgage originations showed a 13% year-over-year decline in 2021 Q3.

Concurrently, home prices keep climbing, which prices some buyers out of the market. Buyers who have obtained loans are financing 4% more of the purchase on a year-over-year basis. Continued low inventory and strong consumer demand are making it difficult for many buyers to head off investors and house flippers.

The Auto Loan Market is Impacted by Inventory-related Challenges

United States auto loan financing companies have stopped offering pandemic-era forbearance programs. Despite that, consumers continue to demonstrate responsible auto loan repayment behaviors.

However, car and truck buyers simply have fewer vehicles to purchase. Ongoing semiconductor chip shortages mean unfinished vehicles are sitting on manufacturers’ storage lots rather than being sold in dealerships. This reduced inventory has sent prices higher, thereby reducing loan originations.

Buyers who acquired new or used vehicle loans paid 14% more over the previous year’s similar period. Average monthly payments have also trended higher.

Challenges Facing the Credit Markets in 2022

Private equity expert Mark Hauser predicts that United States credit markets will face multiple headwinds in 2022. Complex economic issues, along with lingering pandemic-related concerns, could affect credit availability and rates during the year.

To illustrate, in April 2022 there is growing concern that the Fed’s more restrictive monetary policies will negatively impact corporate profits and loan rates. Many financial experts are also worried about a drastic economic contraction as the Fed takes steps to slow the economy. Together, these factors may apply pressure to the credit markets.

Economic Concerns

By definition, economic problems rarely involve a single variable. Instead, each economic challenge consists of multiple interrelated factors. A substantial change in one factor could change the nature of the problem and lead to ripple effects in other sectors.

Troublesome Inflation

Continued inflation has pushed many commodities’ prices sharply higher. The United States Federal Reserve, along with other major central banks such as the European Central Bank, so far view inflation as a pandemic-related effect that will gradually moderate.

However, inflation’s scope and duration have caused concern in many financial circles. This unwelcome phenomenon, which is linked to supply chain problems and skyrocketing fuel prices, could lead to wage inflation.

These developments could cause the Fed and other central banks to raise interest rates earlier and more quickly. In turn, this could trigger market volatility, which often leads to ripple effects in many sectors.

Ongoing Supply Chain Issues

Supply chain problems continue to impact many sectors of the global economy. In the United States, electronic chip shortages have idled vehicle assembly lines and drastically limited the availability of items such as computers and mobile phones.

In addition, sparse (or bare) retail store shelves continue as container-laden ships sit at anchor, waiting to unload their goods from overseas. Collectively, over half of all relevant sectors are expected to experience supply chain backlogs until late 2022.

Not surprisingly, reduced product inventories have resulted in higher prices. Companies in many industries have been able to transfer or absorb these additional costs in some way. With costs under control, businesses in these sectors have continued to be profitable. With slower growth predicted for 2022, however, there will be more pressure on profit margins.

Capital Markets Digitalization

During the past couple of years, capital markets have increasingly moved toward digitalization. Specifically, the pace of asset tokenization and cryptocurrencies adoption continues to accelerate.

This increase in non-traditional currencies utilization has sparked financial market disruptions. As the technology evolution continues, and achieves more diverse market acceptance, these upheavals are expected to increase in scope and number.

Increased Cyber Attack Risks

The global economy’s increased digitalization presents an ever-growing risk of cyber attacks. Mark Hauser warns that financial markets, corporations, and governments can be damaged by carefully targeted disruptions. Specifically, incidences of credit-related cyber attacks continue to increase.

During the pandemic, hackers gained much higher access to information technology infrastructures. These exposures resulted from widespread remote work operations conducted over less-secure third-party vendor networks. Many companies have chosen to keep these remote work arrangements in place, virtually ensuring prolonged higher cyber attack risks.

Businesses of all sizes should devote resources to cyber attack prevention. Lack of attention to this critical area could increase the odds of systemic attacks that could deal harsh blows to multiple economic sectors.

Pandemic-related Impacts

In 2022, the COVID-19 pandemic is still in flux. On the positive side, many countries (including the United States) maintain substantial supplies of targeted vaccines. Coordinated vaccination programs have spurred many people to get one or more of the recommended shots.

The pandemic’s direct economic effects have also greatly diminished, with most parts of the United States economy back in full operation. With that said, however, the pandemic has triggered fundamental shifts in several economic sectors. Commerce, hospitality, travel, and consumer behavior continue to evolve.

New Variants Cause Continued Concerns

However, the continued emergence of new variants has shown that the COVID-19 pandemic has no clear-cut conclusion. In addition, increasing case numbers in heavily vaccinated European countries have led to worries about returning lockdowns. United States public health officials have expressed similar concerns.

Higher COVID-19 Global Debt

The COVID-19 pandemic triggered an increase in global debt. This aggregate outstanding debt figure was expected to rise $37 trillion in 2021. For perspective, this number represents the United States’ and China’s combined gross domestic product (or GDP).

Although this is a troubling development, Mark Hauser says it is not likely to spur a financial crisis by itself. However, dramatically higher virus case counts, potential business lockdowns, and other pandemic fallout could tip the scales in the wrong direction.

As the United States credit markets navigate these and other challenges, private equity executive Mark Hauser advises that the situation remains fluid. Unexpected developments could lead to positive or negative consequences that could spur longer-term ripple effects.