NEW YORK–Higher interest rates are putting a financial squeeze on many consumer finance companies and fintechs which have never been “battle-tested,” according to a new analysis.
“…Finance companies are paying as much as four times what they paid in January to borrow in bond markets the cash they lend to customers,” the Wall Street Journal reported. “Plenty of them are struggling to make that math work. Once-highflying consumer-finance companies such as Pagaya Technologies have flipped from profit to loss. Some smaller outfits are shutting down altogether.”
Many of the nontraditional lenders launched within the past decade, which means they have never weathered a sustained period of high interest rates, the Journal pointed out.
“All of these fintech firms talk about their data science and machine learning capabilities, but the truth is, their models have not been battle tested through a recession yet,” Reggie Smith, JPMorgan Chase & Co.’s lead fintech stock analyst, told the Journal.
The Journal report included Athas Capital Group, an alternative mortgage lender in Calabasas Hills, Calif., which has announced its closure in November, citing the poor outlook for selling its loans to Wall Street firms.
What to Do?
“Do I set a bunch of cash on fire to stick around or do I close shop?” Brian O’Shaughnessy, co-chief executive officer asked the Journal. “We chose, right or wrong, to close up shop.”
Meanwhile, the Journal said it conducted an analysis using data from the Financial Industry Regulatory Authority that found the average price of bonds backed by private-label mortgages recently fell to about 82 cents on the dollar, their lowest level since at least 2011. Bond prices typically fall when interest rates rise and investors demand higher yields to lend money.
Pressures in ABS Market
The result is a tightened squeeze on many lenders unable to package up and sell asset-backed securities. That has been exacerbated by insurance companies and pension scaling back their interest in ABS, said Rich Barnett, a partner at investing firm Castlelake LP, told the Journal.
Rising delinquencies have added to the challenge for many companies.
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