dv01 provides early insight into consumer loan performance
We all know consumers are being hit hard by the economic devastation caused by the coronavirus. With more than 30 million people out of work since mid-March, it is to be expected that many consumers will not make their loan repayments. But there is very little data in the public domain that gives a window into the gravity of the situation today.
Enter dv01. They are now in the third installment of their bi-weekly report, COVID-19 Performance Report, and in no time it has become a must-read publication. Their second report provided insight into loan modifications and defaults, sharing that 12% of consumer loans online at the start of April were either in arrears or the borrower had requested a loan modification. ready. This was about double the amount a month earlier.
Their latest report is super interesting because it provides historical context on loan performance. While the events of the past few weeks are unprecedented in modern history, we can gain insight by examining the performance of loans in areas that have been affected by a major natural disaster such as a hurricane.
Specifically, dv01 looked at Hurricanes Harvey and Irma that hit Texas and Florida in 2017. Obviously we now have a full data set on what happened to outstanding personal loans in the affected areas when the hurricanes have hit. All of the online lenders have offered loan modification options to borrowers in the affected areas, similar to what we are currently seeing nationwide.
Before we look at this, let’s clearly see where we are today. While dv01 doesn’t share exactly who is contributing the data here, they did tell me that they are “most of the major online lenders” in the personal loan business.
In the graph above, we can see from the green line that the payment problems started to increase in mid-March and the blue line shows the month in April (data is up to April 23). Default has gone from less than 6% in 2019 to more than 15% today.
Now, it’s important to note that depreciation data includes both defaults and borrowers who got some kind of loan modification (usually that means permission to skip at least one monthly payment). Given the state of the economy, it is not at all surprising that the number of write-downs is increasing dramatically.
To get an idea of the number of loan modification requests, dv01 has provided this useful daily activity chart:
We see that loan changes started to increase on March 18, with the largest peak occurring around the beginning of April, when many loan payments became due. Interestingly, by mid-April, the number of new loan modification requests had dropped dramatically.
The most interesting part of this report is when they come back to analyze the behavior of borrowers when faced with a natural disaster.
Here’s what Wei Wu, senior data scientist at dv01, said about that data:
Many borrowers affected by economic changes across the region were able to resume repayment once circumstances improved, we observed that hurricane-related changes were 1.6 times less likely to have results. negative than non-hurricane-related changes.
Perhaps more importantly, modified loans were 3 times less likely to have a negative outcome than borrowers at the earliest stage of delinquency. Now the big caveat here is that today’s events are not quite the same as a localized hurricane as the entire nation is affected.
Our latest chart shows more (very early) good news for consumer lenders today. This shows very recent behavior of the borrower on payments that were made even though the borrower had requested a loan modification, meaning that these payments were not required.
Vadim Verkhoglyad, Senior Analyst at dv01 commented:
Even with the caveats discussed above and the economic woes in place, seeing over 10% of borrowers making their first post-modification payment (when most borrowers weren’t required to) is a sign encouraging of what post-edit performance might look like.
There are a lot more interesting graphs and data in the report, but it does provide some useful insight for the personal lending space as to where we are today. The report also included a section analyzing loan performance on non-qualifying mortgages which we will not cover here.
Many reviewers have said over the years that online lenders haven’t seen a downturn, so we have no idea how their loans perform when the going gets tough. We are clearly about to find out. Some have claimed defaults will rise at a higher rate than unemployment, but so far the data does not suggest.
One of the challenges of this unique time is that so many lending platforms and investors are stealing blind. No one knows exactly how loan performance will hold up in the months to come. It is therefore essential that we get timely data that shows the trend of recent numbers. I certainly hope that dv01 will continue to provide these biweekly reports, it is an important service for the industry.