When it comes to lending it’s about young people, stupid

February 19, 2014 at 8:53 am Leave a comment

Just as James Carville encapsulated the theme of Bill Clinton’s 1992 campaign by reminding people “it’s all about the economy, stupid,” an increasingly strong case can be made that your present and future lending growth is increasingly dependent on how you attract and manage young people.

The headlines in today’s paper proclaim the news that consumer borrowing, as measured by the New York Federal Reserve, shot up to its highest level since 2007.  Given the fact that consumer spending drives about two-thirds of our nation’s economic growth, this is good news even if an excessive reliance on debt is what got us into the mess in the first place.

But look a little further behind these results and the lessons become murkier and a little disturbing, as pointed out in an excellent blog post (see below) analyzing the latest numbers on the New York Fed’s Liberty Street Blog .  Specifically, people are doubling down on higher education as a means of securing their future and how these educational investments are managed will say a lot about economic growth in the coming years.

As the post points out, there’s been a tremendous amount of attention given to the growth of student loans in recent years, and looking at these numbers indicate why “first, student loans grew the most of any debt product in both periods (in percentage terms). Second, the growth in educational debt, like that of auto loans, is concentrated among the lower and middle credit score groups.”

Student debt is even getting blamed for squeezing the housing market as explained in the article link below from the Albany Business review.  The argument being made is that lower credit scores and higher debt are making it more difficult for young people to fuel the mortgage market in their traditional role as first-time homebuyers.  The New York Fed’s report adds credence to this theory since originations dropped in the fourth quarter and credit standards are still a heck of a lot tougher than they used to be.

 

If student debt is such an important component of consumer spending, does that mean that NCUA is right to propose a high risk weighting for student loans? Should credit unions just shy away from the private student loan business completely? Of course not.  One of the problems with risk weightings as proposed by the NCUA is that they don’t allow for nuances such as sound underwriting.  For example, commonsense would tell you that helping the daughter of a longtime member go to SUNY Binghamton  is a better investment than lending to a desperate under-employed kid in her mid-twenties signing up for a for-profit school with a high default rate – but the weightings don’t allow for these types of distinctions.

And let’s keep in mind that today’s struggling college grads are tomorrow’s heirs.  As pointed out by a CUNA Mutual Group Analysis, if you don’t go after Gen X and Gen Y, you will missing out on a $30 trillion wealth transfer that is going to take place over the coming years.  

By the way, I’m trying something a little different today by putting the links for this post on the bottom of the page as a way of encouraging easy access to the material.

http://www.newyorkfed.org/householdcredit/2013-Q4/HHDC_2013Q4.pdf

http://www.cutimes.com/2014/02/18/embrace-gen-x-gen-y-or-lose-30t-cuna-brokerage?ref=hp

Rising student debt threatens housing recovery
http://www.bizjournals.com/albany/morning_call/2014/02/rising-student-debt-threatens-housing.html

http://libertystreeteconomics.newyorkfed.org/2014/02/just-released-whos-borrowing-now-the-young-and-the-riskless.html

 

Entry filed under: Economy, General. Tags: , .

Marijuana Limited Can cell phones help reduce world poverty?

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

Trackback this post  |  Subscribe to the comments via RSS Feed


Authored By:

Henry Meier, Esq., General Counsel, New York Credit Union Association.

The views Henry expresses are Henry’s alone and do not necessarily reflect the views of the Association.

Enter your email address to subscribe to this blog and receive notifications of new posts by email.

Join 460 other followers

Archives