Written by Albert J. Haddad
How the recent downturn has tightened the fists of underwriters.
One question that I’ve run up against lately has focused around underwriting. Many consumers are a bit concerned when they hear about how wonderful the economy is but see the process of underwriting has become more conservative.
Why are banks not lending to consumers in a way that would reflect the supposed strength of the economy?
Here are some thoughts based on facts and my own opinion:
- After a strong showing during Q2 and Q3 of 2018—the U.S. GDP was up near 3.4% during the third quarter—fourth quarter numbers waned.
- The GDP fell nearly 0.8 percentage points to 2.6 from October through December.
- Overall the health of the economy was strong during 2018, averaging about 2.9% growth in 2018.
While these numbers do look pretty good, the slight downturn during that fourth quarter began a groundswell that has affected the consumer. One way has been in the underwriting process, where the reins have been tightened on the consumer.
It’s a tightening of the belt for underwriters to protect themselves against what is projected to be a slow growing market. It’s a natural progression and not entirely surprising.
The underwriters are trying to protect themselves against a market that is volatile. In my eyes, the truth of the matter is actually quite simple: the world is a teenager that is growing up and reaching into its pockets and trying to gain a foothold on the world’s stage.
While governments spend money, the economy sees short term benefits but increases the debt. This is the Catch-22 of the current model and what impacts underwriters as they view their dashboard of funding deals.
With the current state of the market, the uncertainty of the future will continue to make underwriting a conservative venture. It has been this way since the recent downturn at the end of 2018 and continues to manifest itself today—even probably into the first half of this 2019 year.
Once interest rates begin to stabilize, especially with the announcement of the Fed pausing on interest rate hikes for the foreseeable future, the overly cautious nature of underwriting should begin to soften. According to the Associated Press, the GDP is still predicted to be slower and steadier. In fact, one report even maintains there is a 50/50 chance we’ll face a recession by 2020.
The question we need to be asking ourselves is why? The simple answer is: It’s a matter of protection for these lending institutions and capital, not wanting to be stuck picking the lint from their pockets because of a bad deal.
If you have any questions about how this will affect you, please call the Alpha-Rex team to discuss and answer questions on any property or portfolio needs you have.