Mike Ginsberg's Musings: Student Loans and Mortgages Take the Reins

Mike Ginsberg

Collection agencies servicing credit card companies and auto lenders know extremely well that delinquencies have been steadily declining since 2010, approaching record low levels.

For over a decade leading up to the Great Recession, these consumer accounts reigned as the largest source of new business for those collecting past due accounts receivable across all asset classes. In recent years, however, mortgage and student loan balances outstanding have emerged as the asset classes with the largest outstanding balances. And these sectors are well positioned for significant growth.

insideARM.com has been tracking this progression very closely over recent months. The basic difference in delinquency percentages among loan types with low rates (auto and credit card, for example) and those with high rates (mortgages and student loans) is attributed to minimum balance levels. Mortgages and student loans typical require much higher monthly payments than credit cards and auto loans. Consumers find it easier to make their car payments and monthly credit card minimums than paying the high amounts required to stay current on home and student loans. As a result, in today’s economy with consumers fighting rising expenses and lost jobs, we don’t expect this trend to change in the near future.

In today’s ARM industry, we are seeing a greater level of account specialization develop among collection agencies and other service providers to address particular client needs. This presents both challenges and growth opportunities for ARM companies across America.

Recoveries on a Bumpy Road to Recovery

For the first time in almost a year, the unemployment rate increased in May as many economists voiced concern that economic recovery halted. Some economists say the U.S. appears to be following Europe and Asia into a slowdown and, as a result, companies are reluctant to increase staff levels. By all measures, the latest unemployment news is troubling and ARM companies should pay attention. Estimates of 75,000 to 195,000 new jobs in May were replaced with abysmal actual results of 69,000 new jobs added. Making reports even worse, April new job levels initially reported at 115,000 were revised down to 77,000. T.D. Bank’s economist said “it’s quite possible this could be the norm now for several months. We are in a cycle that is not built on strong foundations”.

For the U.S. to get employment levels back to where it was before the recession, 200,000 to 250,000 new jobs per month will need to be created for the next 7 years. There is one silver lining: the labor force, which includes workers and those actively seeking work, grew by 642,000 workers – the largest monthly increase in 5 years. Economists view this as a positive sign that confidence levels are improving as people have become encouraged about job prospects. And improved confidence levels lead directly to improvements in liquidation results for ARM companies. We will continue to watch this lead indicator very closely.

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