Opinion: Lenders Are Repeating Recession-Era Mistakes

The 2008 financial crisis should have made a deep and lasting impression on the American psyche. Certainly, anyone that was swept up into the subprime mortgage collapse, either as a borrower or as a representative of any of the major firms that faced disaster, would attest to that fact. After all, it wasn't all that long ago that our national dialogue was consumed by the news of the Lehman Brothers collapse and images of row upon row of foreclosed homes dotting the American landscape.

Now, a decade removed from that collapse and with an economy that appears to be healed from the calamity, you would think that the financial sector would be working diligently to avoid their all-too-recent mistakes. Unfortunately, though, that may not be the case. There are some growing signs that lenders in a variety of market areas are beginning to head right back down the same path that preceded the 2008 collapse, except this time they're being aided by fintech startups with little to no regulatory oversight. Here's what's happening.

Different Asset Classes, Same Folly

Although banks and other lenders have, so far, avoided falling back into the subprime mortgage trap, there is another lending area that's showing similar growth in lending to the marginally qualified – automobile financing. At the time of this writing, Americans hold $1.5 trillion worth of auto loans, and that number is rising daily. At the same time, the average term length for an auto loan has risen to 69 months.

By itself, though, that's not cause for major concern. A quick look at a payment calculator can explain that away. When you consider that 1-in-5 auto loans fall into the subprime category, though, it may be cause for alarm. Add in the fact that the default rate on such loans has risen beyond that of the crisis-era subprime mortgage market, yet that hasn't stopped the flow of loan-backed securities into the hands of willing investors, and you may be beginning to have a feeling of déjà vu.

Smaller Gambles, Larger Risk

There's another part of the lending market that's becoming a cause for concern, as well: the personal loan industry. There's evidence that some big-name lenders are plunging headlong into the sector, seeking decent returns as interest rates start to rise. It's an area that has seen explosive growth due to an influx of fintech lenders, who now represent 36 percent of personal loans made in the past year. The problem is, they should already know better.

One of the unfortunate saving graces (if you dare call it that) of the 2008 subprime mortgage crisis was that the losses in the collapse, though grievous, were still offset by the fact that there were tangible assets held in collateral: the homes themselves. In the personal loan arena, there's no such collateral. If the loans go into default en masse, the lenders will have little recourse beyond standard debt collection tactics. That's a problem when you consider that there's some evidence that more recent loans are already beginning to exhibit higher delinquency rates. All it could take is an economic slowdown to start a cascade effect within the fragile market.

The Coming Downturn

All things considered, the rise in subprime auto lending and risky personal loans shouldn't be a problem as long as the economy continues to fire on all cylinders. At issue is the fact that a growing chorus of analysts and wealthy investors insist that there's a recession coming — sooner than lenders may have anticipated when they began to overextend themselves. If there is a significant economic downturn, it will disproportionally affect lower and middle-class citizens, who have endured decades of flat wage growth and exploding debt loads. In such a scenario, lenders will be the first to feel the effects, and like last time, it won't be pretty.

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