People talk about this k-shaped economy. Is that real or is that a man? I absolutely believe so, but I think that it's a little bit more nuanced. And so, you know, one of the things that we spotted late last year and we're tracking into this year was that we weren't the first to see that it was a k-shaped economy, but a lot of people were making the assumption that the k-shaped economy was being driven by income levels. But when we were looking at the data at the time, we were seeing that those that had were in sort of the higher income level. In our case, that's 150,000 above. So that's not your, you know, people who were running hedge funds and music and, you know, but still it's the relatively better to do, cohort. They were actually seeing the highest year over year increases in delinquency rates at the time. So we knew that okay, hold on a second. It isn't as simple as this. So, you know, we spend a lot of time and thought a lot of banks and we kind of collaborated with them to try to understand what's what's really then the differentiator. And then what seemed to be a really a part of this is wealth. So, you know, a lot of people don't necessarily differentiate income and wealth, but they are separate. Yeah.

And so, you know, when you're looking then at a high income cohort at a time to try to see like, okay, well which ones are doing well. Which ones weren't. Homeownership was the biggest differentiator because they had a bigger cushion something they can rely on, rely on. And then obviously other indicator other aspects as well like stock ownership and and small business ownership etc.. But homeownership is is the one that has the more and the bigger effect because there's more people in the US economy on a whole. And then let's say has a stock portfolio.

Hello and welcome to another episode of the Odd Lots podcast. I'm Joe Weisenthal and I'm Tracy Alloway. I feel like I just do not have any feel right now, unlike the state of the consumer. Really. I mean, your k-shaped economy, labor market slowing down. Then there's like lowest layoffs in years. You go outside, everything looks booming. Like I just have no feel right. I think sentiment is terrible, but consumer sentiment is terrible for years and people keep shopping. I have no sense of it. Right? Well, consumer sentiment actually came in higher than expected most recently. True. Big surprise. But I was going to say are you not out shopping for Christmas presents? It's insane. Right? Yeah. There's a lot of people buying a lot of stuff, buying a lot of stuff. But I think this gets to the K-shaped economy point, which is if you have a cohort of wealthy people who are buying more, it more than offsets the lower income people who are buying less at lower prices. So it's really hard to tell. It's really hard to tell.

One thing that, definitely feels different. You know, if you look at aggregate measures of household balance sheets, like this is something that is very different than sort of like pre grade financial crisis. The, the the general view is that the American consumer or the American household has a very big cushion. There is a lot of home equity built up there. It is not a thin layer. Obviously anyone with money and any sort of, you know, investment account has done phenomenally well. We're recording this December 12th yesterday, I think the S&P 500 hit yet a new all time high. So if you have any sort of home equity buildup, if you have any sort of investment, you are doing very well. On the other hand, of course, people are stretched from years of inflation. We know that hiring has, slowed down. We know that, you know, we see these headlines, delinquencies for cars have like shot up. But I've been seeing these headlines for years. I don't totally know what they mean or how apples to apples they are with the past. I just don't know. I just I'm very confused. Yeah.

You know what's really interesting to me, just from a financial perspective? Yeah. If you look at some of the bonds that were actually built on consumer loans, the weakest ones are now from the like 2020 to 2022 period. Oh, was that so? See, this is another interesting element of measures like delinquencies and why I sort of wonder like how comparable they are. Because okay, partly a delinquency measure is a snapshot of a moment in time. Right? A snapshot of health. But it also inherently reflects something in the past because it reflects, you know, what were lending standards at the time. Right. Exactly. So, you know, and that was a period of low interest rates. Everything was turning on Wall Street banks. Yeah. Give money to anyone.

Anyway, we need to get a better picture of exactly what's going on. How stressed is the consumer? How much do these delinquencies just reflect the profligacy of lenders during the boom times when rates were nothing, etc.? And, yes, we need to figure this out. Especially we're in the middle of shopping season and all that stuff. So I'm very excited to say we really do have the perfect guest. We're going to be speaking with Rikard Bandebo He is the executive vice president, chief strategy officer, chief economist at VantageScore, a credit scoring company. Rikard, thank you so much for coming on the podcast.

Thank you for having me. It's an honor. What is VantageScore, a U.S. credit scoring company. What do you do there? So we're the largest credit scoring company in the United States. And we were founded almost 20 years ago by the three credit bureaus TransUnion, Equifax and Experian. And we sort of created, with a very specific mission in mind to to drive greater competition and credit scoring. Prior to us, that really wasn't a lot of choice in this space. We've also there to create sort of drive more innovation and create the most predictive scores. Which was a big ask from the banks at the time, and also to be able to expand access to millions to enable everyone who really is creditworthy to be able to get access to credit products.

You mentioned the banks. Just then. Can you expound a little bit more on your customer base? Yeah. So, you know, we used obviously the primary use case that most people think about when it comes to credit scores, is for lending, right? When you know, you're applying for a loan and they want to evaluate whether or not you're going to be able to perform on that loan, they'll often pull your credit score as part of that process, but it's used in many other stages as well. So, for instance, many people who are applying to rent in a new apartment building may also get asked for it. When you are trying to get a utility. Definitely in New York, you get asked for it. Yes, you certainly do. And utility bills, telephones, anything that involves a long term commitment on payments generally. Now, you'll often get asked to provide your credit score.

So I just explained for the way you were, you were started by whom? 20 years ago, we were a joint venture by Experian, Equifax and TransUnion, the three national credit reporting agencies. I don't understand what's the difference between these major companies that we've all heard of that provide a credit score, etc. that they such founded you like? I mean, what do you do differently than them? Well, so what they do is they're the ones who, who, collect all this data from lenders and others on your credit performance record. They call credit bureaus. They collect that they're highly regulated. But then most lenders can't just make sense of all of that data on its own. They need some guidance to help to translate that into a what does that mean? Right? Okay.

And so that's where our scoring algorithm comes into effect. Right. And so the scoring algorithm helps to take in all these hundreds of different factors about you. Yeah. To try to then determine what does that mean about your propensity to pay okay. You mentioned predictive analysis as well. What exactly is that and what's that based on. Well so when credit scores are created right. The aim the goal is to try to evaluate what is the likelihood of somebody going to, default on a payment over the next 24 months. So when you see that score, the score is actually a translation of a probability. Yeah, I don't odds right. To evaluate what is that risk.

And how did we end up with the system of Fico scores in the US because it has like an interesting history? Well, you know, back in the day, fair Isaac, you know, they created the first sort of known credit score. They were the first ones to realize that, you know, there was a free and fair Isaac. Is that focusing? Yes. Oh, okay. Yes. Keep going. Let's go back a bit. Right. So in the old days, you know, lending was not necessarily the most fair system that there was, right. You know, they may want to call up your previous employer, they may call your landlord, they may just ask around. And if they don't know anything about you, you know, there was a lot of judgment involved in lending a lot of racial discrimination as well. That certainly was built into that system. Right.

And so, then there was a law career, the Fair Credit Reporting Act. They said, like, you can't do that. You need a, you know, a better system that is fair. And that is a better quantitative ability to assess people's risk. Right. And that created than this, need to be able to consolidate all this quantitative information in a way that lenders could easily use it. So, you know, a Fico was the first fair Isaac at the time was the first to create that. And they did very well doing so. But, you know, then there was a need for, competition, innovation and there was a lot of frustration around the time of 20 years ago that there was only one game in town, and it and it didn't score about 20% of the US population. It still doesn't. And so and then a lot of lenders were felt frustrated. Like, like if it doesn't work for 20% of the population, there's a problem. We need something different. And so then and the bureaus took the unusual step of actually coming together to create an alternative. And that became Vantagescore interest.

Can I, as a consumer, go, credit score shopping. So the, first of all, there's different ways to, to use it, right? So a lender will typically choose the credit score that they're going to use for being able to, underwrite alone with you. And often, you know, they'll use many more factors than just a simple credit score, right? Particularly the more sophisticated ones. However, when you're trying to understand what your situation is, you had lots of different places you can go. You can either go to the credit bureaus, you can go to the likes of Credit Karma. There are many different services out there, but I can't force the lender to look at a specific don't look at yeah, look at this one over here. It's great. You get a second opinion. No, I'm afraid not. That's not how it works. It's really, you know, the lenders try to determine what is the most appropriate score for their product and different. And there are many, many different schools out there that schools that are in some cases built specifically for types of products, like auto loans and the other schools that are schools that are generic, that can be used for any type of product.

What do you do? See, you collect more data. And you mentioned that there is this wide swath of the population that doesn't that that wasn't being captured by the credit bureaus. What do you do additionally, on top of them to expand the pool, find potentially creditworthy borrowers that the, that the, that they had been missing before. So, you know, the the the thing is that, the quality and the types of data that's been collected by the credit bureaus has improved significantly over time. Okay. And so when we started creating our algorithms were, you know, the current version that's now being adopted for mortgages, the version four, we're releasing version five this year. We obviously we actually go and rewrite the whole thing each time so that each time we can come up with the most accurate way based on the current data available and our current ability to understand how consumers are behaving, because that behavior changes over time.

You know, other companies, what they've done is they built a model long time ago. They don't like to necessarily revealed everybody how it works. The secret sauce. Right. So when you're seeing that as a chief risk officer, and there's a new model coming along, either you want to understand that it's going to be very similar to the previous one to be okay with it, or you need to get a lot of transparency in how it works so you can get comfort in this new model. So I think there's the big divergence in strategy. We go back to boots and redo everything from scratch each time, but in the same time provide an awful lot of transparency and a lot of tools so that lenders can get a really good understanding of exactly how this is going to work and how it's going to behave in different situations. And they can test it out right. Whereas the other one is still working with many limitations that have been in place since the very first models. And because of those limitations, that's a big difference in why, we score a lot more people.

So I give you a very concrete example. So for instance, one of the limitations that the others have is that if you haven't had any credit activity for the past six months, you're not going to get a score. So you could just imagine somebody that is, to watch the military been deployed overseas or anything else. Right. But the good thing is, you know, starting about, you know, 15 years ago, the bureau started collecting and storing data so we could use time series data, because who'd have thought that time series data could be useful in prediction, right. Completely strange idea. Right.

So with with Vantagescore before we started and using trended data time series data. And with that obviously we can see about 24 months. So yes, if there's a gap in six months of history, it's important. But we're still able to see what happened before then. Right. And that gets rid of, you know, tens of millions of people when you have that constraint. There are other constraints in there too. So people that are new to credit. So if they haven't had a full six months of history, again, they won't get scored. And then if they only trade lines, they won't get scored. Right.

And so what we've been able to do is to deal with those constraints in a different way by a using time series data, b using some other data points. So we were the first to use M utility payments and rent. I mean, who'd have thought that your ability to pay your rent could somehow, again, be useful in trying to assess your your risk? Right. And so, you know, including those new different types of data, realizing that these constraints can be changed now that you have time series data, but then also guess what? You know, math has evolved as well. Okay. And so, you know, what we realized too was that you if you can be really smart and use some new methods like, you know, some AI methods, for instance, like clustering to really understand, well, look, here's a group of people and they behave in a certain way. And by doing that in a better way, we can then figure out what is the best way to measure this group of people here versus this group of people here. And doing that well enables you to build much more predictive scores.

And so that's an important the answer to that. Not a lot of people always realize is that it's not one formula that's calculating everybody's score. You know, people will get depending on what their credit file looks like and the history looks like, they'll get divided into, you know, different segments, and then each segment is scored according to that. And that again increases the ability to score people accurately and score more people like in our case, it's 33 million more people that we're able to score. So it's quite substantial.

How did the models deal with, breaks in previous consumer patterns? Because we have seen, some major ones in recent years. So after the pandemic, we had phenomenal, a phenomenally tight labor market. And we saw a lot of wage growth for lower income, a lot of spending that was sort of unprecedented in many ways. How do models actually incorporate that sort of big shift in the trend? So I think that's something really important to try to understand. And it's and it's not easily understood by many. So give me a second here. I'll try to break this down. This is no we have when people say, give me a second, I have to break this down. Please break it down. You can have a minute. Have a minute. Honestly, that's kind of what I enjoy most about listening to your, podcast. Yeah.

And so, like, the first thing to understand is that this credit score is not an absolute measure of risk. It's a relative measure of risk. And let me break that down for you. Right. So what it means is that, you know, a score, if somebody did score 720 in 1 month and then somebody else has score 723 years later, the risk will be different. And the reason for that is very deliberate when we are evaluating a person. Right. Because of the laws of the fair Credit Reporting Act. Right. We're allowed to look at the things that are about you, but there are things that are going out on at the same time in the economy that impact risk of the population as a whole. Right?

So that's why it's so important when you're looking at things like credit scores to understand when was that score pulled? Right. Because the score, 720 in 2017 had a very different characteristic, of a score of 720 in 2022. Okay. Now, but the thing to bear in mind is this is an excellent relative measure of risk. So at any one given point in time, you know, somebody with a 720 is going to be much better performing than somebody at 630. And the same time somebody at 840 is going to be much better than both of them. Okay. And that holds consistently true. And so that's why it's very important and still obviously very important to include when you're making lending decisions.

But you know, lenders have to be thoughtful, right? They have to as they're making decisions about, you know, how many people they want to be to underwrite and how to think about risk. They need to also start thinking about these external factors as well, so that they can then, you know, set their underwriting criteria to meet the kind of level of risk that they're willing to take on this mixture. I had never thought about this, but of course, that makes so much sense. So it's like I could have an excellent credit history. I could have ex employment pay all my rent, but for example, if the economy is going down the tubes, I may still yet be a risky credit because I may lose my job at some point. And so this idea that it kind of has to be relative because the underlying conditions that affect everyone are they're outside of our control, but they are still important from the perspective of the lender.

Exactly. And at the same time, you know, if you get declined for credit card, you can't be told that the reason you're getting declined is because unemployment has hit 5%. Okay, right. It's that doesn't work that the laws are very specific. The reasons for why you're not getting the top score have to be explained, and they have to be based on, on, attributes and data, obviously, that are specific to you.

What's the most important external factor when it comes to credit scoring? Because I've heard arguments for obviously the labor market, the unemployment rate, but also wage income and therefore real disposable income. How do you weight those different factors? I mean, I think if you're a lender, it's going to really depend upon what types of consumers you're lending to. Right. And particularly now we're seeing such divergence across consumers in terms of who's doing well and who isn't.

And so, for instance, if you are a lender focused on people that are kind of below prime, let's say that not completely subprime, but that near prime group and, and you're, you know, you're focusing on auto loans and you know, you're in regions like Texas or in certain areas, then obviously, the understanding the economic conditions that are affecting those people, like, you know, a lot of those people would be working in certain types of industries. What is employment like in those types of industries? Right. Or is it people that are in the gig economy? Right. And so, it is quite nuanced. It's not necessarily one thing and it's going to depend.

Whereas on the other extreme, you know, if you're handing out black cards and your audience is incredibly affluent, then again, you know, it's it's less about the risk because at that point, your risk of default is probably 1 in 10,000, right. So they're they're just trying to make, you know, sure that it is absolutely risk free. All right. So someone in a highly cyclical industry, like, I don't know, truck drivers in Texas or something that we're taking out, auto loans would probably be seen as riskier or the labor market would depend more for them. Whereas if you're taking out, you know, a black Amex card or something like that, probably real disposable income. Yeah. Okay.

So you mentioned different segmentation. Is the, people talking about this k-shaped economy, is that real or is that a meme? I absolutely believe so. But I think that it's a little bit more nuanced. And so, you know, one of the things that we spotted late last year and we're tracking into this year was that we weren't the first to see that it was a k-shaped economy, but a lot of people were making the assumption that the k-shaped economy was being driven by income levels. But when we were looking at the data at the time, we were seeing that those that had were in sort of the higher income level. In our case, that's 150,000 above. So that's not your, you know, people who are running hedge funds and etc. and, you know, but still it's, it's the relatively better to do cohort. They were actually seeing the highest year over year increases in delinquency rates at the time. So we knew that okay, hold on a second. It isn't as simple as this.

So, you know, we spend a lot of time and sort of a lot of banks and we kind of collaborated with them to try to understand what's what's really then the differentiator. And then what seemed to be really a part of this is wealth. So, you know, a lot of people don't necessarily differentiate income and wealth, but they are separate. Yeah. And so, you know, when you're looking then at a high income cohort at a time to try to see like, okay, well which ones are doing well and which ones weren't homeownership was the biggest differentiator because they had a bigger cushion, something they can rely on, rely on. And then obviously other indicator, other aspects as well, like stock ownership and and small business ownership etc.. But homeownership is is the one that has the more and the bigger effect because there's more people in the US economy on a whole. And then let's say has a stock portfolio.

I talk more about mortgage rates because this feels pretty key when you're talking about the k-shaped economy, which is if anyone, anyone who bought their house before 2020, is probably a very lucky person and, has locked in a low mortgage rate, I think mortgage rates are still even after the rate cut, we're at like 6% or something versus I think at one point they got down to like 3% right after the for people like 2.5%. Yeah. Crazy. Yeah. And so if you bought a house then you actually have this like massive cushion, as you put it, versus someone who's buying a house now or in the past couple of years in a way, I see there's a bit of a silver lining when it comes to housing, right?

We we have seen rates come down this week. Hopefully they will continue to come down next year. Yeah, there's a lot of debate, obviously even within the Federal Reserve. Mr.. Exactly. The the speed at which that's going to be accomplished. And obviously there are many other factors that can impact that. But I the reason we see a silver lining is to for two reasons. Okay. As interest rates comes down, obviously for people to own homes, that's their biggest monthly payment. Right now there isn't much, point for many to refinance given what the interest rates are. But if it comes down a bit more, it'll be much more. It'll make much more sense for a large tranche of homeowners that have higher interest rates to be able to to make that switch. So we'd expect a bit of a refinancing boom as it hits a certain level.

But the other thing that's really exciting about what's happening in the homeownership space is that in the, this year, the FAA changed the rules about, what can be used, what credit scores can be used in mortgage. So historically, they've used a very old version. That's from the 90s, of the classic score, in, in mortgage applications. And that was actually not deliberately done. So it was just that it got written into the rules. And then since then, as a recommendation, but then it became kind of the de facto a monopoly, in that space.

And the problem is that's a model that, went through the last crisis and the Federal Reserve, a Saint Louis actually found that it, it didn't work well at all in that situation. In fact, it saw a bigger rate of increase in delinquencies amongst those that were prime than it did amongst those that were subprime. So the rate of increase, which is not how a model supposed to work, surprisingly. Right. And so, what's happening now is that the, they have allowed for vantagescore for to be used. And the reason I say that is it's a because as I mentioned before, it a lot more people, when they have the ability to get access to homeownership. So that will create a bit more demand. Okay. Right.

And the other thing to think about too is who are these people that, that get access to this. Right? It's a lot of people that are not necessarily in the areas that have been, have been so crazy with house price increases. Right. There are a lot of rural communities, like. So if you look at the state where there's the biggest difference between score of all people with a new score, it's actually West Virginia. And so those economies could certainly do really well from a change to more people having home ownership. And then the second thing too, is obviously R&B is really important. Had some challenges back in 2008, 2009. Right. And so having a better plan is a very important, modest way.

I heard about those challenges. I think they came up a couple of times. I was educated in the UK. Pardon me. We have a tendency to understate things, but, you know, having a newer, more proven model, one that's, you know, worked so well and credit card and other things for the past eight years, it's become the most used model in, in many other segments. So having a proven model that's new and more predictive is should help as well with reducing the systemic risk in the arms market.

Just just to go back very quickly because I don't I it sounded important. Can you just clarify a little bit more. What is this rule change such that could unlock additional source of demand? Okay. So, when you went to a bank before, wanted to submit loans to Fannie Mae and Freddie Mac. Okay. They could only submit those loans using the Fico classic score. Okay, okay. Which is actually 2 or 3 different scores and go into that another point. But anyway, and and they used to be like a cutoff that if you'd have 620 then you couldn't, be able to submit it. You could go to an FHA, FHA loan. But those are more expensive. Right. But you couldn't necessarily get a, a, a normal conforming loan that goes to Fannie Mae and Freddie Mac.

So that's not changed. The first of all, that minimum limit of Fico been removed. And now, they are just updating all the pipes to allow them to use Vantagescore as a choice. So now there will be a choice. Lenders can choose which score they want to to use, and they can make their own evaluations about which one performs better.

Okay, so let's go back to, starting at the end of last year. And you saw that increase in delinquencies among fairly, people with decent incomes. Maybe they didn't have as much. Well, talk to us about the numbers. How big were these numbers? How much did they catch people by surprise? And what is the story there about why there was this delinquency pressure? Well, so, you know, the good thing is it's available since the end of last year. But, you know, when we're looking at this data, then again, look, high income earners, not surprisingly, have lower delinquency rates than middle income earners. And that had themselves lower delinquency rates than the lower income. Right.

But not a lot of people were looking at that kind of year over year trend and the momentum. Right. I'm always looking at momentum because I'm trying to get an early read on kind of how things are developing. And so at the time, you know, we saw actually let's go back a little bit because I think it can explain a little bit more about what's going on in the economy. Is that right? So, when the pandemic happens, right, a lot of stimulus comes in, a lot of forbearance programs are put in place as a result of that. So many people's, you know, credit, health and the way that they appear on the on the credit files improved dramatically. They're paying down their credit cards. They were building up their savings. It was a it was a good situation, temporary, but good.

But then, you know, 20, 21, 22 starts creeping in and we start seeing that, okay. This is not a persistent situation. This was a one off. Right? And we started seeing delinquency rates starting to come up again. Right. What we saw, which shouldn't be too surprising, particularly given that that was when inflation was kicking in, in a, in a big way, was that those that were initially impacted and who are seeing the biggest rises were the lower income households. Right. So for the first sort of, you know, six months, nine months, that was the group that was seeing the biggest year over year increases.

But then what we started seeing was that, you know, come 2023 forward, we actually started seeing that, then the middle and higher income households were starting being impacted, too. And that's probably related to the fact that lower income households had less, disposable or income, but they also had less savings put away so that, you know, they're the first to feel the pain. But then when there is this consistent imbalance between your inflows and outflows, right, you can even if you have, you know, 30,000 or 50,000 that's put away, that's going to start depleting. And that's what we started seeing happening even with these higher income households, because at the same time, you know, they were hit by so many pressures.

Right. Biggest rent increases I think we'd ever seen it came into, you know, came into effect those few years after Covid. Right. We saw things on, you know, car prices, the cost of auto financing going up through the roof and then various other things, you know, very other costs also went up substantially. And so, you know, it's not that higher income people were immune from this, right? Also, you know, as an economist, you know, a lot of people always talk about, hey, when inflation kicks in, it disproportionately impacts lower income households because the cost of bread, the cost of milk, etc.. You know, it's not like high income people buy milk. That's 100 times more expensive, right?

But the reality is, is if you look at people's big outlays, right, many of those actually scale with income rent, for instance, people that earn more tend to rent higher. Other big outlays such as, you know, their, child care, education and other things. They also have been scaling more with income. Now, obviously there's a level of income that you know that that does not apply to. But if we still talk about that cohort, 150 to 250 or so of household income, they're definitely seeing that they felt the pain too. They it took them longer before it started impacting their delinquencies. But they did start feeling the pain.

The good news though is, that as we started looking at the second half of this year, right, so we still saw those delinquencies and high incomes rising very heavily at the beginning, the first half of this year. But since July, and I've got data from October. So, you know, of the three of the four months since July, we've seen that higher income households came down. So that's a good sign. And the reason I say that's a good sign is not because I'm a fan of making the k-shaped economy even more so. But the fact that so much of the U.S. economy is driven by spending, and you mentioned earlier that high income households disproportionately impact, that and so if that dries up, that has a knock on effect on the whole economy. So to the fact that we're seeing that cohort, that those delinquencies are starting to come down, I think there's some light at the end of the tunnel.

that reminds me, actually, I always wondered, how useful are big shopping events like Black Friday or Christmas in terms of gauging consumer sentiment? So you you always see the headlines. You certainly saw them this year, you know, record Black Friday spending. But then you also see people break down that spending and say, well, actually it's because everyone is so pressured. They really need the low prices. So they're buying everything. Now, how useful is something like that to you?

You know, you can always see trends, right? And so you know that from one perspective, it's always good to look at a number of different things, such as spending on Black Friday, Cyber Monday, etc., because, you know, there are nuances into how people have been spending for those weekends over 20 years. But still, if you look at the last three years, you can start to see things that are happening. But the thing that, you know, I haven't been able to get my head around is how much of that year over year increase in spending in the holidays is driven by the prices of the goods going up. Yeah. Versus people buying things that would have traditionally been more expensive or splurging more that for me isn't obvious. And I think that again, when trying to understand how the economy is going, it's so important if you're looking at from a spending perspective to actually look at the different merchants.

Right. So how is McDonald's doing and what are the trends there? What's happening in high end? How is LVMH doing versus, you know, Walmart, etc.. And so, because again, you know, even though I said that, you know, there's a silver lining in the high income, consumers are, you know, seeing declines, middle income have come down, but they're still increasing and low income are are staying persistently higher on 8% year over year increases, in their delinquency rates. And so again, there's we're probably next to you. You're going to see more more households struggling to make ends meet than we saw this year.

I still don't think that there is, you know, you know, just looking at the trends going to be any kind of major break point. But the thing to bear in mind with that, though, is that if you look at here the situation and you look at, for instance, JP Morgan published that, you know, the amount of cash people have in their checking accounts is coming down. So it just means that there is more of a challenge if there's a big shock to the system at some point. Not that I can foresee any shock to the system, but it's always something to be a little bit wary of.

before we going, I want to go back to something you said very quickly. You said, okay, intuitively, people with higher incomes, they're going to have delinquencies at a lower rate than people's middle incomes, and they're going to have, delinquencies, a lower rate than people with lower incomes. That's not intuitive to me, actually, because I would also imagine that underwrite is very different, etc. it's not obvious to me why higher income people default less than lower income people, because I would imagine lenders know their income and they're going to have, you know, they're going to scrutinize the loan of a lower income person much more intensely, etc.. So why why should this trend exist, given that they are don't they don't get they don't don't get the same loan terms or same loan availability?

No they don't. And you know, a high income household by typically is more expensive than a car than a low income household. Well, but higher income households tend to have more of an ability to squirrel some money away, or they tend to have, other assets that they can't or knows that the lender knows that the higher income, household is going to have likely more savings than the lender knows, that the household that's in a very tight income probably has very little, cushion in the form of what we call wealth. And so why doesn't that just get baked into the underwriting standards?

Well, in in ways it does. Right. And so, you know, when you're, you know, you're underwriting a loan for, let's say, somebody who is high income and has a good credit history, your expectation of their default is going to be incredibly low, right? So that's built into the pricing and that's built into, you know, and you obviously don't just look at a credit score. You look at, you know, what their income is and various other important metrics to be able to determine the appropriate amount that you will lend them, etc.. Right. But higher income consumers may not need to take on as much debt as a proportion to their income as lower income households to make. But, you know, to to get through what they need to do. Right.

And so if you look at, for instance, a high income household, how much of their, even though, for instance, probably housing and car costs are some of the biggest outlays they have, proportionately, they're probably less than for lower income households. Right. And so you know, a lot of it has to do with that proportionality. But then also just that, again, they will tend to have a bit more reserves so that they can ride through situations.

Talk to us about auto delinquencies. Those have been rising. And obviously there's a lot of lending going on. Again, Tracy mentioned a sort of 2020 to 2022 vintage car prices themselves are going up. So not only have the rates gone up, but we've seen a tremendous amount of auto inflation. So sort of stress at every level. We see the numbers going up. One of those tell us as a fascinating story. There's been a lot of interest, that was paid attention to auto loans because, you know, suddenly in 2022, we started seeing this auto loan delinquencies going up much faster than other types of loan delinquencies. And it was having a profound effect, obviously, on auto lenders and the economy as a whole.

And, you know, everybody is trying explain. Well, you see, we got a bit too loose during the period of Covid and other things, and they started adjusting their lending criteria. Right? So they did adjust their lending criteria, around 2023 for most of them. But then we started, we still saw that despite that, the delinquency rates kept persistently increasing. And then when we looked at the data, we actually saw that, you know, when you they had actually had an impact by adjusting their landing, their lending criteria, we saw that the delinquency rates among subprime auto lenders, where auto loans reduced quite dramatically after that. So they did have that effect. But we saw that the delinquency rates on near prime and Prime continued to go up. And that was what drove that increase. And so we realized there's something more going on here.

And also why is it it's so different. So we went back a long time. We went back to 2010 to try to understand kind of what's been going on. Because not many people look at it from that time scale, but it's actually quite fascinating because back in 2010, auto had the best performance of any loan product at the time, it was the least risky. This was always the narrative. The Americans will never give up their cars. Even if they lose their job. They can sleep in their car and live in the car, which is very dystopian. But that's I remember hearing that story literally from a banker, a banker who was actually working on bundling phone loans. And he was like, the other thing, right? Yeah. No one will give up their phone. Yeah.

So, you know, so at that time it was, you know, it was a it performed well. Right. And people did not default as much on that as on other products. But then we've seen it has transitioned over that 15 year period to now, you know, being the first quarter of this year, it was the riskiest credit product out there. And then subsequently student loans started coming in. And that's another story. You know, those delinquency rates are at historic levels. But on the auto loan side, we then trot out what's causing this. Right? And so what we've seen was that, there's a number of factors, some of them obvious, some of them a little bit more subtle, right.

The average cost of a car has gone up an incredible amount. And what we've seen is then the average loan value for, auto loans has increased more than any other loan value. And that may sound like okay, but if you think about it, mortgages tend to be the one that caused the most because house prices have appreciated so much over time. So the fact that the average auto loan has grown more than the average mortgage has over that 15 year period is telling. Okay. Secondly, obviously there is this you know, there's this double whammy. So not only is the car more expensive, but then more recently interest rates have been higher. Right. And so you know, they're not going to have to pay more, not just for the principal but also the interest.

But I think one of the things that has caught many, consumers off guard is, okay, so they're in the dealership, they're being shown some numbers, some people get it and they go like, okay, yes, we can still do that. We can make it work. We can just about mix and stretch. Because also I think people are trying to buy either the same that they had before or slightly better. I know many people like downgrading okay. And so they think, well, it's the same car and yes, there's a little bit more, but we can make ends meet, right? By looking at these numbers. But what they often forget about is that insurance has gone up significantly, as have just the cost of ownership. Repair costs have also gone up substantially. And so when all those things then hit them, they can be in a situation where we just can't make it work.

And so, you know, that's that's not good. And, you know, the good thing is, of all the loan products, mortgages are performing pretty well. Okay. That's they are increasing, but they're still much, much lower than they were back in 2010 and obviously much lower than 28 to 29. So, but if you default on a mortgage, it takes some time before anything really happens, right? With an auto loan, they they will come and they will take that car away from you. And given that, you know, so many people rely on that car to go to their job, to make their income to, you know, to do other tasks, they're important, like they're shopping or taking their children to the school or other things that they need to do. People don't willingly just default on these auto loans. And so I think it is a sign that correlates with the fact that, you know, more households are struggling to make ends meet.

How much insight do you have into leverage? And the reason I ask is because we've seen an explosion in buy now pay later. Programs, virtually every site you go to now has three different options for getting a loan for a small amount, and only a few of those. My understanding is are actually reporting to the credit bureaus. So and I can also imagine if you're a lower income person who is perhaps more pressured, you're probably going to turn to a family member and say something like, hey, can you loan me, I don't know, 500 bucks to make it to the end of the month? And there's no way that credit scoring bureaus are going to have insight into things like that. Informal loans.

There's, you know, the credit data that comes from the credit bureaus is still incredibly productive and useful, but it doesn't capture everything. Like Alex was on I think recently, a firm has is done to provision data to the credit file, which is great, but that not all of them are there. And so, you know, I think there is still a lot that's not visible. And that is definitely a concern to lenders. We've been here their concerns about stacking and and things of that nature. Obviously, you know, these companies haven't got to where they are without having some understanding of risk themselves. Right. So they're not going to necessarily just let someone who's not performing a loan take out another five Bnpl loans.

Right. And the ability of a consumer to go to all different Bnpl providers and use that. There's a level of effort and sophistication required to do that there. Certainly I'm sure there going to be some, but I don't know how many people fall into that category. Nevertheless, it is a concern that more is invisible. And that's why I think, you know, being able to pull in more than credit file data, such as cash flow data becomes really important. And so what we're seeing is that there are more and more on, that are looking to incorporate cash flow into the process because then they can have a better understanding of the ins and outs.

Right? Is their checking balance, going up or declining over time. You know, are there is that does our income look like it stable? Does it look like it's more sporadic. And so we still have started building now credit scores that also incorporate that type of data. And that I think is going to become even more important, as we go forward, because there are going to be more and more ways that consumers can borrow. So that's probably the better way to get that holistic view.

so quickly. Auto delinquencies, are they are they at their highest level ever right now or close like. Yep. I mean they are. Yes. And so you know and and they're continuing to to go up. So what we have seen though is that credit cards, for instance, they went up a lot. So they went on to delinquencies. Credit card delinquencies went up a lot in 2324. But they've started coming down and we started seeing personal loans coming down as well. So it's a very nuanced picture. So we've seen the and securitized, delinquencies have started coming down this year, year over year. But we're still seeing mortgage and auto loans continue that, you know, to continue to increase, which is pretty topsy turvy when you kind of think about it.

So the other thing happening now is, insurance rates going up. Because of the, I guess non extension of previous subsidies. And one thing you're seeing all over social media is people posting their new insurance rates for 2026. And I've seen some crazy ones, you know, something going from $600 to like $1,800 a month. How much pressure would you expect something like that to exert on the consumer for next year?

It's you know, for many it's going to be the straw that could break the camel's back, right? It's just, you know, particularly if it's just like car insurance can be a very significant outlay for for many households. But, you know, there's other insurance for homeowners. Homeowner's insurance is going up. And particularly if they're in areas like California or Florida where, you know, natural disasters have led to, you know, an increase in premiums above the national average. And so, again, like, I don't see that there's any one thing that is going to cause a, the house to fall down. But at the same time, just there's more and more households where that that one unexpected increase puts them in a, in a, in a situation that then makes it impossible for them to make, their, their payments that month or for a number of months.

Talk to us about the resumption of student loan payments. I mean, you mentioned the importance of the it's not only the stimulus, but all that sort of forbearance. And so all this stuff is the one thing that just kept getting pushed forever was the resumption of student loans. How much when that when those numbers turned back on or those payments turned back on. How what kind of impact did that have? And what are we seeing with student loan delinquencies? Yeah, it had a very big impact. And so, you know, if we look back before Covid, the average, student loan delinquency rate was around that 10% was sort of wavering around between 9 and 11% in that sort of range.

And then obviously in this five year period, of, of forbearance, as I know, reporting, because you had a period of a year between 24 and 25, through 24 where, they were starting to need to make payments, but they just weren't being reported. So that's a basically a long period of time where people just got used to not having to make that payment. And also a very substantial part of student loan borrowers who never had ever made a payment because they, you know, they finished their their studies or they, you know, in a period when there was forbearance.

And so what then happened was they started trickling back onto the credit file sort of mid-February of this year. And then I think you got the first batch really kind of come in by May. And at that point you saw that the delinquency rates on the student loans that were not in deferment was over 20%. So they were over double what the historical norm was since then. And at the highest level ever, it is the highest level that we've seen going back a long, long time. So remember, there's been a lot of changes when it was not federally mandated and privately owned. So I don't have visibility going back as that far, but at least in recent history, is absolutely the highest by a very substantial amount.

And that's not too surprising. But one of the things that we've seen is that we expected that there would be some people who go into delinquency not because they intended to. Right. And so there were some people who they moved and they didn't get the addresses or a lot of people that were confused because there's so many mixed messages like, we're going to be forgiven, but there were not and we're not certain program. But now that program doesn't exist anymore. So, you know, some people have been able to then address that. And so it's come down to this or 17, 17.5%, which is a good sign. And so that's improving.

But there still are people who are on programs that have, that have been killed, like the, the Safe program. And so they are going to next year, have to either get on to another forbearance program or start making payments. And so it's maybe we haven't seen the full effect. Then basically of the resumption of student loans, which we've seen the biggest batch come through, but there still are some more, cohorts of consumer borrowers. That will either have their existing program expire, or that aren't being reported yet because, and the servicers are trying to figure out exactly what's going on before they report to the credit bureau. So there still is a little bit of lack of visibility there from on the credit servicer side.

Rikard, thank you so much for coming on Odd Lots That was great. Thank you. Thank you so much. Tracy, It always comes back to, insurance doesn't it? That's always like the thing the there's, the little fly in the ointment is, you know, you buy this car and it's like, okay, here's the car and here's the interest payment. Oh, I think we can make the math work, but you can't control what that insurance payment is going to be. You have no idea what it's going to be. This is my theory. Insurers secretly run this. They were on the run. The world. They really do.

You know, the other thing I was thinking, and we've written about this in the newsletter, but one of the difficulties of our current economic moment is there is so much division and difference built into the aggregate. If you're just looking at a single number, a total, like if you looked at the average Fico score of an American, it tells you almost nothing now because the the individuals are so disparate. Yeah. And it really does come down to, you know, wealth. Right. And there's this this is what wealth is just such an important factor in the economy. We always talk about income and income inequality and of course that's a real phenomenon. But wealth is such an important predictor driver of anything.

And it also goes to show like how important like financial market and asset prices are to the real economy. And it gives me once again an opportunity to say the stock market is the economy, because we live in such a wealth driven economy. You know, someone once wrote into me, I wrote something about pressures on lower income people, and someone wrote into me saying, well, why don't the lower income people own more assets? If they did, they'd be in a better position. Have you tried not being poor? Why haven't you tried just being rich? Why haven't you tried buying in video 20 years ago? Why have you tried buying a house in California in 2009 after the bust? It's that simple. Stop being poor. Seriously.

The other thing I was thinking just on auto delinquency is I also think the trade down story is a big piece here, which is, I mean, a car from ten years ago now is pretty decent. And I say that as someone who owns, I think it's a, Toyota Rav4 from like 2011 or something like that. Oh, yeah. Like it's pretty dependable and I don't really feel the need to get like a fancy new car. And I imagine if you're under pressure on your car loan, it's probably like not that difficult necessarily to find an older car that is somewhat reliable.

I don't know, you know, the one thing though. So I have a car, that I bought in 2015. It runs, perfectly. Well, I would not be surprised if it continued like, no issues at all. It doesn't have CarPlay integration. Oh yeah. The one difference between an older cars and newer cars is that it's very nice. Like having that know that that interface where you have like, got a little speaker or something. Yeah. But what it doesn't have is that like really nice interface with the map. Like, and I know that to minor, but it's like, oh, do you have a map. It has a really it has it's a Subaru. For those curious, and it's like, you know, it's like they're in-house to crappy map. It's not the really nice like Google Maps where it's, like, really clear and it doesn't have turn by turn navigation. I know this sounds like kind of minor, but it is very annoying. And like when I am in a car that has like a modern, I have a little tangent here when I am in a car that has like a really nice interface with, a nice Google Maps or Apple Maps and the Spotify integration. It's very nice. And apparently we've taken into the dealer, they just cannot. It is on. Oh really? Yeah, it's on upgradable. There's no for some reason there is no way to put in a new dash. Oh, sorry. I thought you meant un upgradable in terms of trading it in for. No no no don't. Upgradeable is like we cannot like this. We could never install CarPlay or whatever. Yeah.

You know, my husband and I rented one of those, like, big fancy trucks, pickup trucks. And I was amazed by the amenities that are actually. Yeah, including, like, the heated seats I personalized heated, heavy heated what? Yeah. That's fancy. You know, it is very nice in the winter. Heated seats. We just talk about cars for, yeah, maybe a while longer. But the thing is, like, even for a car like that, I just. I cannot imagine spending like, $100,000 plus whatever the interest rate actually is on something like that. I remember that, meme from like, 2010 was like, no one will ever do. Yeah, that was a big thing. And the phone, it really was two things that people will always find a way to make a payment for the car and the phone, I forget. Right?

Which is why I think you have to look at something structural that's shifted. And I suspect maybe it's the availability of, you know, lots of older cars, but just, just one last point. It's I thought it was very interesting. Ricardo was saying it's like there's no obvious catalyst for classic cataclysms. There's not obvious like, oh, here is something we are on the verge of consumer credit collapse. But it is a story of just like steadily building pressure, right, such that if there is some sort of spark or something, there is a lot of stress, not, you know, the resumption of student loans after five years, the fact that the total loan price of the car has gotten so high relative to people's income, all of these different things see you like have all these upwards dresses on prices.

You have all of this reliance, obviously, on accumulated wealth, most notably stock market and home equity. So you have a lot of things coming together that are not necessarily disaster or anything like that, but the, the, the alignment of pressures isn't there where things could potentially get bad. Right? The consumer is much more fragile. Yeah, than they used to be. They might have been a few years ago. Yeah. All right. Shall we leave it there. Let's leave it there.

Okay. This has been another episode of the Odd Lots podcast. I'm Tracy Alloway. You can follow me @TracyAlloway and I'm Joe Weisenthal. You can follow me at @thestalwart. Follow our producers Carmen Rodriguez @CarmenArmen, Dash Bennett @dashbot and Cale Brooks @CaleBrooks And if you want more Odd Lots content, you should definitely check out our daily newsletter that is at bloomberg.com/odd lots and you can join fellow listeners in conversation. Talk to them about the economy 24-7 in our discord, discord.gg/oddlots And if you enjoyed this conversation then please like or leave a comment. Or better yet, subscribe! Thanks for watching.