Opportunities in various FinTech segments are known to differ. The lending business, however, appears to be among the most promising, especially in the United States, where the aggregate household debt balances increased in Q1 2017 for the 11th consecutive quarter, finally surpassing the Q3 2008 peak of $12.68 trillion.
According to the latest report on Quarterly Report on Household Debt and Credit published by the Federal Reserve Bank of New York, as of March 31, 2017, the total household indebtedness was $12.73 trillion, a $149 billion (1.2%) increase from Q4 2016.
In which areas can FinTech startups help American households with deep indebtedness?
In Q1 2017 mortgage balances reached $8.63 trillion, including $491 billion in newly originated mortgages
The Federal Reserve Bank of New York reports that in Q1 2017, mortgage balances, the largest component of household debt, stood at $8.63 trillion, an increase of $147 billion from Q4 2016. Both balances on home equity lines of credit (HELOC) and loan origination decreased in Q1 2017 in comparison to the previous quarter:
- HELOC declined by $17 billion and now stand at $456 billion
- There was $491 billion in newly originated mortgages this quarter overall, down from $617 billion
What's more important, mortgage delinquencies worsened slightly, with 1.7% of mortgage balances 90 or more days delinquent in Q1 2017. Moreover, of mortgages in early delinquency, 18% transitioned to 90+ days delinquent, while 36% became current.
Although foreclosures remain low by historical standards, ~91,000 individuals had a new foreclosure notation added to their credit reports in Q1 2017, an increase since the previous quarter.
For technology startups, the mortgage market is an area yet to explore. There are a very limited number of examples of FinTech startups that are focusing on mortgage in comparison to other low-value types of consumer credit.
In fact, FinTech startups in the mortgage market are fairly narrow focused, as opposed to institutional representatives providing comprehensive services. Mortgage-related FinTech startups offer services in such areas as:
- Processing (Roostify)
- Analytics (Credit Sesame)
- Digital mortgage brokerage (Habito)
- Marketplace lending (LendingHome)
- Mortgage auction (LoanDolphin)
- Digital mortgage lending (Clara)
With some companies offering a full spectrum of services, mortgage remains a complex high-risk product – the seasonally adjusted FHA delinquency rate increased to 9.02% in Q4 2016 from 8.3% in Q3 2016. With all its complexity, however, the mortgage business represents an opportunity for an overhaul, with technology having a massive impact on every aspect of it.
As technology startups bring more people into light using alternative data and enrich the pool of ‘bankable’ individuals, they are presented with an opportunity to take further steps in developing solutions for those groups that would allow expansion of eligibility for financial products – for mortgage, in particular. After all, in 2015, there were 26 million credit invisible consumers in the US, according to the report by Consumer Financial Protection Bureau (CFPB).
In Q1 3017 student loan balances stood at $1.34 trillion; auto loans increased by $10 billion
The report suggests that outstanding student loan balances increased by $34 billion, and stood at $1.34 trillion by the end of Q1 2017. The report highlighted the following findings:
- 11.0% of aggregate student loan debt was 90+ days delinquent or in default in Q1 2017
- Auto loan balances increased by $10 billion, continuing their six-year trend
- Credit card balances declined by $15 billion to $764 billion, with credit card 90+ day delinquency rates deteriorating to 7.5%
In total, consumers originated $132 billion in auto loans in Q1 2017, which indicated a decline from Q4 2016.
The certain decline on all fronts may be connected to increased threshold of the median credit score for originating borrowers. For auto loans, the credit score for originators went up to 706 (the median origination score for mortgages increasing to 764).
While the origination volumes to borrowers with credit scores over 720 have increased considerably, the same for borrowers with credit scores under 660 shrank since the same quarter last year. Given that over the past 10 years, over a third (34.2%–36.9%) of the US population has been steadily categorized as having a subprime credit score (<620, which is considered to be a bad credit score), the trend indicated a market need for solutions that would address the needs of consumers with unfavorable institutional terms and profiles.
Another opportunity can be seen from the data on delinquency rates – by the end of Q1 2017, of the $615 billion of debt that was delinquent, $426 billion was seriously delinquent (at least 90 days late or “severely derogatory”). The percent of student loan balances that transition to serious delinquency has remained high, hovering around 10% at an annual rate over the past five years.