The credit quality of loans originated in the US by so-called marketplace lenders and backing new asset-backed securities (ABS) is unlikely to change meaningfully in 2017, Moody’s Investors Service says in its just-published outlook for the sector. The performance of loans backing outstanding deals likewise is expected to remain overall stable.
“A relatively high level of uncertainty surrounds the sector owing to the short performance history of the loans and a year of largely negative developments for the industry,” says Moody’s analyst, Jody Shenn. “Although marketplace lenders’ underwriting and practices for unsecured consumer loans, in particular, will be generally stronger amid heightened scrutiny of the industry in 2016, other factors will largely offset these changes.”
In response to heightened scrutiny, marketplace lenders that focus on unsecured consumer loans have adjusted their underwriting models, operations and business strategies in ways that will help strengthen the credit characteristics of the loan pools that back new ABS, Shenn says. Lenders are also gaining more tools to combat risks such as fraud. These changes are however relatively modest, and some lenders have cut back direct mail solicitations due to lower demand, which may have increased the number of loans coming from less reliable channels.
In other areas, student loan marketplace ABS will include only marginally weaker collateral next year, as lenders seek to broaden their borrower base to maintain origination volumes. But the overall quality of these loans should remain strong. Meanwhile, stronger bank appetite for small business loans could lead to a weakening of securitizations in this sector.
Moody’s also expects the asset performance of outstanding transactions to be stable in 2017. “Although we forecast that the economy will pick up, growth will remain subdued, meaning economic conditions will support loan performance across lending categories, but not substantially lift it,” says Moody’s Shenn. “Furthermore, many Americans face financial challenges and consumer loans in outstanding deals include debt originated before underwriting strengthened. Meanwhile, the very strong performance of student loans from marketplace lenders leaves little room for improvement.”
Originations and issuance are expected to rise next year, depending in part on financial market conditions and on how well marketplace lenders meet their evolutionary challenges.
“An improved economy and the industry’s efforts to recover from its challenges should lead to higher originations in 2017, though any economic weakness, significantly weaker loan performance or financial market disruptions could slow volume considerably,” Shenn adds. “Issuance of marketplace loan ABS could be less affected by negative conditions, depending on the nature and strategies of loan buyers.”
This report, “2017 Outlook – Credit Quality Will Be Generally Steady as Lenders Look to Reestablish Confidence,” can be accessed here.