The payday-loan business was in decline. Regulators were circling, storefronts were vanishing and investors were abandoning the industry’s biggest companies en masse.
And yet today, just a few years later, many of the same subprime lenders that specialized in the debt are promoting an almost equally onerous type of credit.
It’s called the online installment loan, a form of debt with much longer maturities but often the same sort of crippling, triple-digit interest rates. If the payday loan’s target audience is the nation’s poor, then the installment loan is geared to all those working-class Americans who have seen their wages stagnate and unpaid bills pile up in the years since the Great Recession.
In just a span of five years, online installment loans have gone from being a relatively niche offering to a red-hot industry. Non-prime borrowers now collectively owe about $50 billion on installment products, according to credit reporting firm TransUnion. In the process, they’re helping transform the way that a large swathe of the country accesses debt. And they have done so without attracting the kind of public and regulatory backlash that hounded the payday loan.
In the decade through 2018, average household incomes for those with a high school diploma have risen about 15%, to roughly $46,000, according to the latest U.S. Census Bureau data available.
Not only is that less than the 20% increase registered on a broad basket of goods over the span, but key costs that play an outsize role in middle-class budgets have increased much more: home prices are up 26%, medical care 33%, and college costs a whopping 45%.
To keep up, Americans borrowed. A lot. Unsecured personal loans, as well as mortgage, auto, credit-card and student debt have all steadily climbed over the span.
For many payday lenders staring at encroaching regulatory restrictions and accusations of predatory lending, the working class’s growing need for credit was an opportunity to reinvent themselves.
Enter the online installment loan, aimed in part at a fast expanding group of ‘near-prime’ borrowers — those with bad, but not terrible, credit — with limited access to traditional banking options.
Ranging anywhere from $100 to $10,000 or more, they quickly became so popular that many alternative credit providers soon began generating the bulk of their revenue from installment rather than payday loans.
Yet the shift came with a major consequence for borrowers. By changing how customers repaid their debts, subprime lenders were able to partly circumvent growing regulatory efforts intended to prevent families from falling into debt traps built on exorbitant fees and endless renewals.
Whereas payday loans are typically paid back in one lump sum and in a matter of weeks, terms on installment loans can range anywhere from 4 to 60 months, ostensibly allowing borrowers to take on larger amounts of personal debt.
“The benefit of installments loans is you have more time to make the payments; the downside is the payments on these high-cost loans go exclusively towards the interest, possibly for up to the first 18 months,” the National Consumer Law Center’s Saunders said.
The industry, for its part, argues that just as with payday loans, higher interest rates are needed to counter the fact that non-prime consumers are more likely to default.
Between Enova and rival online lender Elevate Credit Inc., write offs for installment loans in the first half of the year averaged about 12% of the total outstanding, well above the 3.6% of the credit card industry.
The surging popularity of online installment loans, combined with a growing ability to tap into big data to better screen customers, has helped boost the fortunes of many subprime lenders.
Subprime installment loans are now being bundled into securities for sale to bond investors, providing issuers an even lower cost of capital and expanded investor base. Earlier this month Enova priced its second-ever term securitization backed by NetCredit loans. The deal paid buyers yields between 4% and 7.75%. Its debut asset-backed security issued a year ago contained loans with annual interest rates as high as 100%.
The bulk of their growth has been fueled by the middle class.
About 45% of online installment borrowers in 2018 reported annual income over $40,000, according to data from Experian Plc unit Clarity Services, based on a study sample of more than 350 million consumer loan applications and 25 million loans over the period. Roughly 15% have annual incomes between $50,000 and $60,000, and around 13% have incomes above $60,000.
For Tiffany Poole, a personal bankruptcy lawyer at Poole, Mensinger, Cutrona & Ellsworth-Aults in Wilmington, Delaware, middle America’s growing dependency on credit has fueled a marked shift in the types of clients who come through her door.
“When I first started, most filings were from the lower class, but now I have people who are middle class and upper-middle class, and the debts are getting larger,” said Poole, who’s been practicing law for two decades. “Generally the debtors have more than one of these loans listed as creditors.”
If anyone needed further evidence of Hong Kong’s sky-high real estate prices they found it this week with news that a car parking spot sold for almost $1 million.
The space went for HK$7.6 million ($970,000), making it the most expensive place to park an automobile in the city, and perhaps anywhere in the world.
The car-parking spot is (in)…The Center in Central, which also happens to be the priciest office tower in the world. For the cost of the parking space, you could buy a one-bedroom apartment in Manhattan.
Side note, …the seller was Johnny Cheung Shun-yee, a businessman with a reputation for flipping property. He made around HK$900 million last year in about nine months by buying and selling floors in the same office building.
First because I really enjoyed this mock interchange by Matt Levine of Bloomberg representing the initial investment conversation between Adam Neumann (WeWork) and Masayoshi Son (Softbank). Just to repeat, this is most likely not what was said.
Son: What does your company do?
Neumann: We lease office buildings, spruce up the space and sublet it in small chunks.
Son: Hmm I invest in visionary tech stuff, this doesn’t really sound like my thing.
Neumann: Did I mention we are a state of consciousness. A generation of interconnected emotionally intelligent entrepreneurs.
Son: Okay yeah that’s more like—
Neumann: The world’s first physical social network. We encompass all aspects of people’s lives, in both physical and digital worlds.
Son: You’re crazy! I love it! But could you be, say, ten times crazier?
Neumann: You’re going to invest $10 billion in my company, which I will use as kindling to light the whole edifice on fire, and then when we are both standing in the ashes you will pay me another billion dollars to walk away while I laugh at you.
Son: All my life I have dreamed of meeting someone as crazy as you, but I never really believed this day would come.
Neumann: I’m gonna use your money to buy a mansion with a room shaped like a guitar, where I will play the world’s tiniest violin after all your money is gone.
Son: YES PUNCH ME IN THE FACE.
Neumann: Also I’ll rename the company “We” and charge it $6 million for the name.
Son: RUN ME OVER WITH A TRUCK.
…An unpleasant truth for many Americans, even at a time of abundant global oil supplies: Regional differences in taxes, environmental rules and access to energy infrastructure can translate into large seasonal swings in gasoline prices.
Prices have surged this fall in California and other West Coast states following outages at several refineries in the region. Analysts said the coast is generally vulnerable because of its limited pipelines and refineries that turn oil into fuel products such as gasoline. Higher gas taxes in some states aiming to fund local infrastructure projects and varying pricing strategies by energy companies also drive gaps.
The volatility isn’t an isolated event. The standard deviation of gas prices—a measure of how much each state’s price varies from the national average—has hit its highest level this year in data going back to 2005, according to price tracker GasBuddy. The figure has risen in each of the past three years.
And for those that haven’t been following the riots in Santiago, Chile, John Authers of Bloomberg summarized the situation very well in his 10/22 article “Chile’s Violence Has a Worrisome Message for the World.”
People in many of the world’s most advanced nations – including the euro area, Japan and the U.S. – are holding more of it than ever. In the U.S., for example, currency in circulation stood at an estimated $1.76 trillion as of late September. That’s about 8.2% of gross domestic product, up from just 5.6% before the 2008 financial crisis and close to the highest level in at least 36 years.
Benjamin Franklin’s share of total U.S. currency in circulation reached 80% in 2018, up from 73% a decade earlier.
The city of Berlin has agreed drastic measures to curb the surging cost of housing in the German capital, including a five-year freeze on rents and the right for tenants to have them lowered if they exceed a government-imposed figure.
The new curbs — presented by Social Democrat mayor Michael Müller and members of his leftwing government on Tuesday — will apply to an estimated 1.5m apartments.
Supporters say the measures are needed to preserve affordable housing for low-income households, and to halt the spiraling rents of the past decade. But critics warn that the Berlin plan will drive away investment and exacerbate the severe housing shortage in the fast-growing city.
Soaring rents in Berlin and other large German cities have become politically controversial in recent years, and a favorite campaign theme for left-wing parties.
According to a study by Immowelt, a property website, rents in Berlin have jumped 104% since 2009. The average rent per square meter in the city stands at €11.60 ($1.20 per square foot “PSF” per month), a notable jump from €5.70 ($0.59 PSF) in 2009 but still lower than the 2019 prices in cities such as Munich (€18.60) ($1.92 PSF) and Frankfurt (€14.20) ($1.47 PSF).
Under the new plan, landlords will be banned from raising rents for the next five years. The city will also give tenants the right to demand lower rents if they exceed official rent caps by 20%. According to the new rental table presented on Tuesday, the maximum rent landlords can demand for recently-built apartments is €9.80 per square meter ($1.01 PSF), with minor top-ups allowed only for properties with high-quality fittings or located in an especially desirable neighborhood.
Berlin has gained almost 400,000 new residents over the past decade, taking the city’s population to 3.75m. The recent growth reflects at least in part Berlin’s new-found economic dynamism: long derided as a business backwater, devoid of important corporate headquarters, the city has emerged as a location for the technology and start-up scene.
WSJ – Daily Shot: statista – Deaths from Air Pollution by Country 10/21/19
In 2019, about 19% of U.S. households with six-figure incomes rented their homes, up from about 12% in 2006, according to a Wall Street Journal analysis of Census Bureau data that adjusted the incomes for inflation. The increase equates to about 3.4 million new renters who would have likely been homeowners a generation ago.
It isn’t unusual for high-earners to rent in pricey coastal cities like New York and San Francisco, where sky-high real-estate prices have long limited homeownership. Yet these markets account for less than 20% of the new six-figure renters, according to the Journal’s analysis.
To accommodate well-off renters, developers have raced to erect luxury apartment buildings around city centers. Investors, meanwhile, have bought hundreds of thousands of suburban houses to turn into rentals and are increasingly building single-family homes specifically aimed at well-heeled tenants.
The average tenant of the country’s two largest single-family landlords, Invitation Homes Inc. and American Homes 4 Rent, now earns $100,000 a year, the companies say. These companies own some 133,000 houses between them in attractive neighborhoods with good school districts around growing cities, like Houston, Denver and Nashville, Tenn.
In each of those cities as well as in Seattle, Cincinnati and Ann Arbor, Mich., the number of six-figure renters doubled or better between 2006 and 2017, making them the fastest-growing segment of renters in these markets, according to the Journal’s analysis.
The big home-rental companies are betting that high earners will continue renting. Bankrolled by major property investors like Blackstone Group Inc., Starwood Capital Group and Colony Capital Inc., these companies snapped up foreclosed houses with the expectation of renting them to educated workers who could afford to pay a lot every month but perhaps not buy.
High earners also tend to stay put and are willing to absorb regular rent increases if it means not having to move their children to new schools. That translates to lower turnover and maintenance costs for the landlords. “These tenants are treating our houses as if they are their homes,” American Homes CEO David Singelyn said at a real-estate investment conference this summer in New York.
Invitation and American Homes have reported record occupancy and rent growth as well as ever-growing retention as their average renters’ income has risen into six-figure territory.
Those who do want to buy a home face the additional hurdle of high prices that have surged beyond the reach of even relatively high earners in cities with strong jobs growth. Prices in 75 of the country’s 100 largest metro areas have surpassed their precrash highs, not adjusting for inflation, according to mortgage data and analysis firm HSH. Many of those cities, such as Salt Lake City and Raleigh, N.C., also have some of the fastest growth in high-paying jobs. The sharpest recovery, according to HSH, has been in Denver, where home prices have doubled since 2012 amid an influx of California tech workers and New York finance firms. Prices are nearly twice their precrash high.
It takes an annual household income of about $90,000 to afford Denver’s median-priced house, which costs around $471,000, according to HSH. But that is assuming buyers have 20%, or about $94,000, for a down payment.
“The lack of savings for a down payment in this country is grossly underestimated,” said John Pawlowski, a housing analyst at Green Street Advisors, who estimates that the typical renter’s net worth is about $5,500. “Consumer balance sheets are not good.”
It’s been a decade since the worst financial crisis since the Great Depression, and yet here we are in a world where the highest government bond yield starts with the number “2.” Among the world’s major developed economies, only the English speaking countries – the U.S., U.K., Canada, New Zealand and Australia – still have monetary policy rates above zero. But there is more to low yields than monetary policy rates, and those factors are likely to stay in place for an extended period.
The following table shows the highest interest rates culled from the 20 largest developed countries from the policy rate to the 30-year bond. Over 200 interest rates were considered and the only one to yield above 2% is the 30-year U.S. Treasury bond at 2.04%. Never has the highest yield among these countries been so low.
Core inflation has been low and stable for 15 years and shows no signs of a secular acceleration anytime soon. Low rates of inflation mean interest rates should be in the low single digits. Without a serious return of developed world inflation, which has not been the case for almost 25 years, gone are the days of 4% to 6% yields without a crisis, like the one in Europe’s government debt market around 2012.
Next is the global savings glut, a phrase coined by former Federal Reserve Chairman Ben S. Bernanke in 2005. As populations age, they have a propensity to save. This is shown by the following chart from the International Monetary Fund. Note that prior to 2005, the global saving rate was never above 24.5%. Since then, it’s only been lower during the panic of 2009. The rate equaled its record high of 26.7% in 2018. This works out to roughly $21 trillion saved every year. Since many seek to match the investments in their savings to their life expectancies, they tend buy bonds.
The savings glut is leading to massive bond buying that is resulting in yields dropping below the inflation rate nearly everywhere in the developed world.
The two factors above alone should be enough to make investors understand that the fair value for developed world yields now start with a “1” or “0,” but two other factors are driving yields even lower, and into negative territory.
One is the global flight-to-quality. As the world economy slows, the natural reaction is to allocate into safe fixed-income securities. Look no further than last week’s reaction to the poor manufacturing data in the U.S. Bonds rallied and equities slid. Yes, flight-to-quality is a cyclical factor that is present when the concern is about a slowing world economy. So, expect this factor to come and go over time. Right now, though, it is “coming.” This flight-to-quality has created to much demand for bonds that the amount of negative yielding debt increased by $8 trillion this year to $14 trillion.
Yes, central banks might reverse from their negative interest-rate policies, but that only means developed world rates, without a crisis, will only go up to 1% or maybe 2%. Every future downturn will add back in flight-to-quality buying and negative central bank rates, and down market rates will go again to zero or even lower.
The secular outlook has changed and those applying the thinking from previous economic cycles about inflation and real yields conclude these low yields represent a bubble. They are not considering aging populations that are buying bonds and pushing yields below inflation rates driven lower by advances in technology. Add aggressive central banks willing to take monetary policy rates into negative territory and the standard rules that say bubble have not worked for almost a decade. Don’t expect this to change anytime soon.
The most commonly asked question from U.S. investors is where they can find yield. Unfortunately, for those still hoping for a previous cycle to return, we have bad news, you have it now at 1%. Embrace it and be lucky U.S. yields are not negative – yet.
Investors are now paying for the privilege of lending it cash. A sale of 487.5 million euros ($535 million) of 13-week bills Wednesday drew a yield of minus 0.02%. Greece joins the likes of Ireland, Italy and Spain benefitting from the European Central Bank’s supportive monetary policy and deepening fears of a global recession.