2021 was noteworthy for many reasons. For many financial institutions, the 2021 lending rebound caused a sigh of relief. Thankfully, the fear of mass loan defaults which caused financial institutions to beef up their loan loss reserves did not materialize. Low-interest rates increased consumer demand for credit, driving up new mortgage originations, mortgage refinances, and credit card credit lines. With excess liquidity due to increasing deposits, financial institutions wanted to make loans. Let's take a look at what unfolded last year.
An Abundance of Available Funds to Lend
Since the pandemic's beginning, the federal government released billions in assistance to small businesses and individuals via stimulus checks. These fiscal support programs amounted to a record $2 trillion
reaching deposit accounts at banks across the country since the start of the pandemic in 2020. On average, Americans saved 40%
of their cumulative federal relief income. Credit union total assets increased by $231 billion, or 12.9%, to reach 2.02 trillion
over the year ending in Q3 2021. Regular shares and deposits increased by $189 billion, or 13.4%, to $1.60 trillion
during that same period. This elevated liquidity meant the funds for loans were readily available if consumer demand was there. It was.
Loan Demand is Plentiful
At the start of the pandemic, fiscal support programs from the federal government left individuals and businesses flush with cash, reducing demand for credit on the consumer side. Optimism was running high at the beginning of 2021. Although the potential impact from the Delta variant caused analysts to cut their expectations for economic growth, year-over-year lending thankfully increased 5.8%
over the period ending in Q3 2020. Total loans outstanding increased $67.1 billion to $1.22 trillion
during that same period. Delinquency and charge-off rates for Q3 2021 were down 8 basis points
compared to Q3 2020, with a delinquency rate of 46 basis points
. The net charge-off ratio was 26 basis points
, down from 48 basis points
from the prior year by comparison.
Record low-interest rates led to a boom in refinancing and home purchase lending. Homeowners looking to save money quickly took advantage of these savings. Loans secured for 1- to 4-family residential properties increased by 5.3% to $536.1 billion
in Q3 2021. Auto loans also increased by 5.1% to $398 billion
in that same period.
The shortage of new cars due to the semiconductor chip shortage created an unprecedented demand for used cars. As of December 2021, the average price for a used car was 35% higher
than in the beginning of the year. This was reflected at federally insured credit unions where used car loans rose 8.3% to $256.6 billion
in the third quarter, while new car loans fell 0.3% to 141.5 billion
in the same time frame. This presents an excellent opportunity for auto refinancing campaigns to get members out of high-interest used auto loans.
Credit card debt increased in 2021 despite Americans paying off an estimated $83 billion
in credit card debt in 2020. On average, Callahan and Associates reported that Americans put 1/3 of their stimulus checks
towards paying down debt in 2020. However, recent data from the Federal Reserve Bank of New York showed credit card balances increased by $17 billion
in the third quarter of 2021. This balance was expected to grow during the holiday shopping period, presenting an opportunity for balance transfer offers in 2022.
Despite higher education enrollment rates for undergraduates dropping by 3.2%
in fall 2020, non-federally insured student loans at credit unions rose 8.1% to $6.4 billion
for the year ending Q3 2021. Most interesting is that one particular segment of higher education, online colleges, reported a 5.4%
drop in undergraduate enrollments and a 13.6%
drop in graduate enrollments. This is significant because online enrollment should have been the perfect alternative for students worried about COVID-19 exposure during in-person classes. It appears students are entering the job market rather than go to college due to concerns about student loan debt.
The Potential Impact of Rising Interest Rates
Despite the record breaking COVID-19 case rates caused by the new Omicron variant, so far the Federal Reserve
has indicated they will wind down their pandemic support and increase rates in an effort to battle looming inflation. The benchmark rate which affects borrowing, lending, and economic growth has been near zero since the start of the pandemic.
With rising interest rates, the 800-pound gorilla in the room is how consumers will use their excess liquidity. As rates rise, consumers may choose to pay off higher-rate interest loans such as used cars and credit cards. However, they may decide to keep the funds in preparation for a potential repeat scenario caused by another COVID variant. COVID-19, with its subsequent Delta and now Omicron variants, has many consumers concerned about returning to COVID-19 restrictions without stimulus programs. With all the real estate purchased in 2021, there will likely be opportunities for home equity lines of credit and, as mentioned earlier, the refinancing of auto loans and credit card balances. Increased inflationary pressure driving up the cost of consumable goods will also create favorable lending conditions for these loans.
The More Things Change, The More They Stay The Same
In 1849, the French writer Jean-Baptiste Alphonse Karr wrote: “The more things change, the more they stay the same” (feel free to drop that little nugget at a dinner party). Regardless of the economic environment, consumers love to save money on what they have. However, consumer sensitivity for loan payment reduction is heightened during periods of personal and financial stress. The lack of stimulus programs, inflation, and rumors of rising interest rates are causing consumers to consider the impact those changes will have on their financial condition. If the mortgage refinance and originations in 2021 are any indication of rate sensitivity, then auto and credit card refinancing may be the loan stories of 2022.