Raddon Research Insights. Lending Insights: Promoting Growth in a Challenging Lending Environment

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1 Lending Insights: Promoting Growth in a Challenging Lending Environment

2 Contents Executive Summary 3 Introduction 4 Evolution of the Lending Market 4 Cultivating the Home Purchase Market 12 Home Equity Lending Is There an Optimistic Outlook? 17 Automobile Lending Drives Growth 23 Growing Profitable Credit Card Relationships 28 Conclusion 35 Survey Methodology 35 About Raddon 36 2

3 Lending Insights: Promoting Growth in a Challenging Lending Environment In the past decade, economic factors, demographic shifts and evolving consumer attitudes about debt have dramatically altered the lending market. Financial institutions must respond with new strategies in order to reach their loan growth and earnings objectives. How have these changes impacted consumers use of lending products? How can financial institutions attract profitable new lending relationships? Raddon, a Fiserv Company, answers these key questions about changing consumer behaviors and their impact on financial institutions. This paper also points to strategies and tactics that financial institutions can employ to maximize their performance during a period of finite loan demand. Evolution of the Lending Market The U.S. lending market looks very different today than it looked a decade ago. While credit card and student loan use is unchanged, consumers have made a broadbased retreat from housing-related loans such as mortgages, home equity loans and home equity lines of credit (HELOCs). Only a third of all consumers have mortgage loans today, compared to half (47 percent) of all consumers in This drop can be attributed to a number of factors, including the $8 trillion housing market correction in 2008, the financial regulations that ensued, Qualified Mortgage standards, availability of affordable housing, a shift in consumers personal financial goals, and the expected transition of a maturing population from the net borrowing stage of life to the net saving stage. 4

4 Figure 1: 10-Year Trend in Loan Product Usage Fewer consumers use mortgage-related loans and auto loans 90% 84% 60% 47% 30% 0% Credit Card 34% 22% 16% 15% 15% 11% 11% 10% Mortgage New Auto Student Used Auto Personal LOC 19% 7% 9% 5% HELOC Retail Store Loan 11% 2% Equity Loan Source: Raddon Research Insights HELOC usage has been cut in half. Seven percent of consumers report using the product today, compared to one-fifth (19 percent) of all consumers in Likewise, home equity loan usage has fallen to just 2 percent of consumers compared to 11 percent of consumers who reported using this fixed-rate and fixedterm equity credit product in The decline in equity credit product usage is chiefly a result of declining home values in the aftermath of the Great Recession from 2008 to Declining values erased the equity consumers had built up in their homes, and lenders were hesitant to extend equity credit. Tighter underwriting standards were developed, and homeowners became hesitant to use their homes as collateral. There are smaller yet statistically significant declines in new and used auto loans as well. In 2006, one-fifth (22 percent) of consumers reported using a new auto loan, while today only one in six (16 percent) consumers report using a new auto loan. Used auto loan usage has declined from 15 percent to 11 percent of all households. The decline in auto loan use can be attributed to financial constraints that may have prevented more consumers from taking on additional debt.

5 Figure 2: Household Debt Service Payments as a Percent of Disposable Personal Income Consumers are better at managing their personal debt levels 13.5% 13.0% 12.5% 12.0% 11.5% 11.0% 13.1% 12.6% 12.8% 12.7% 11.9% 11.0% 10.5% 10.5% 10.1% 10.1% 10.0% 10.0% 9.9% 9.5% Demographics of Loan Product Usage Mortgage-related loan products are currently concentrated among consumers between 35 and 64 years of age and consumers with annual incomes of $50,000 or more. Consumers who earn less than $50,000 are significantly less likely to use any type of mortgage-related loan product. Credit card usage is fixed among consumers over 45 years of age and with more than $50,000 income Middle Income Depositor and Upscale groups (see Survey Methodology for specific definitions of Raddon s six consumer segments). Fourth Quarter of Each Year Source: Board of Governors the Federal Reserve System Figure 3: Loan Product Usage Indices* Younger consumers are significantly more likely to use consumer loans Under to to to 64 Over 65 Less Than $50K $50K to $125K $125K Plus Age and Income Categories Any Mortgage-Related Loan Any Consumer Loan Any Credit Card *100=An Average Usage Index Source: Raddon Research Insights 6