So let's talk about the consumer credit landscape just to sort of get us started. So first, just think about a household balance sheet. Household balance sheet, the liabilities and the assets. If you look at the assets of typical household, what are you going to see? Well, you've got the physical assets. Usually you've got a house and you probably have a car maybe couple of cars. Well, now if you're lucky, you've got a boat and you've got a vacation home. Lots of things you might see. But typically, what do you think about? You're thinking about a house and one or two cars. You got those physical assets and then you've got some financial assets, your retirement savings, you've got your 401K or other sorts of retirement savings, maybe you've got some other investments you've got going, you'll see those assets as well. Then of course you've got another asset of the household is going to be the human capital, the skills and experience that members of the household have acquired which are going to be valuable for them going forward, giving them the possibility to add value and make money in years to come. So those are the assets you're going to see. What about the liabilities? Well, now you're going to see and the liability side, you're going to see the debt that was incurred in acquiring those assets. So you have a house. Well, you have the mortgage that helped you buy the house and you have cars. Well, very often you have car loans that helped you buy the cars. Then for that human capital, well there's the student loans. You have student loans that you took out to pay the tuition so that you can go to school, get that degree, get the training and now have that human capital. So you have that too. What else you're going to see? Well, there can be credit card debt that you incurred for whatever purpose and of course, there could be some other debt too. Here is a graph that I got off the website of the Federal Reserve Bank of New York. This is actually a great website for you guys to look at in your spare time. They've got consumer credit, sort of sliced and diced every way, sort of quantities and interest rates and delinquency, all the different sort of statistics, warning signs and so on you might be interested in. I just picked off here their summary chart showing just total household debt evolving over time. So you look at this graph here we're seeing household debt in the US, total household debt evolving from the beginning of 2003 all the way to the end of 2018. So every bar here is a quarter. So the total height of the bar is all household debt and then the different colors are the different types of household debt. You see the orange is the biggest. That's your mortgage debt. Then you've also got home equity lines. You've got car loans. You've got credit card debt. You've got your student debt and then finally, one sort of catch-all for the other which is where by the way, all the FinTech lending is going to show up, a lot of it. So you look at this graph you see well, one thing of course. You see the big picture there. You can see which looks very gentle here. It wasn't gentle when it happened. It was the financial crisis right. You can see the ramp up, you can see more debt through like 09 or so and then it comes off. Why is it coming off? Well, of course, you can see mortgages go up and come down. A lot of that would be of course for closures and other problems like that. So you see consumer debt come up, go down and then it is recovering and it's now actually higher than it was at the peak of the crisis. But if you look closely, you see that the mortgage debts, the biggest part of it but it's not because of mortgage debt that we are now in a situation of more debt than we had at the peak of the crisis. The mortgage debt has not actually recovered all the way to where it was at its peak. It's the other elements that have driven us higher. Here's a graph. Let me just walk you through what's on this. On this graph all I've done is, I've taken all the non-mortgage parts of consumer credit and graphed them separately here. Each line here it's just taken that same graph before and now I'm graphing everything but the mortgage debt. So you see this one line showing us the home equity loans and then the car loans, credit cards, student loans and everything else. Let me just pull out what I think are the key trends to notice in this graph. So one thing you'll notice here is that credit card debt it came off a bit after the peak and its comeback. It's right about now at where it was at the maximum has when people were taken down their cards to deal with the crisis in like 09 or so. So it came off a bit again and then has come up. Not a whole lot of movement there. Home equity lines have fallen off a lot. They're almost down like half of what they were borrowing under home equity lines. Then you'll see what's really taken off. Actually taken off here is student loans and car loans. Now student loans. Look at that student loan line, that purple line there. Notice how much has gone up and almost in a straight line. In 2003, you're looking at about a quarter trillion dollars total of student loans. End of 2018, $1.5 trillion of student loans. That's a sixfold increase over those years. That's an enormous increase. That's really as I said, the major consumer credit story of our time. So student loans have gone up a lot and you can see also the other. Look at the red line there, car loans. Car loans have really taken off too. Car loans are about half a trillion more than they were when they bottomed out about six years before. Also notice the other does this catch all sort of other term that actually has been trending up over the past five or six years as the home equity lines have gone down. So now there's about $410 billion of this other which is something we want to keep our eye on here. So every sort of consumer credit is ripe for disruption by FinTech. Mortgages. Now the largest mortgage lender in the country is Quicken. All right, Quicken. They grew out of helping you with your taxes, right? Well, Quicken is now the largest mortgage lender. Other FinTechs that focus on car loans, as you see car loans have taken off. But we're going to focus here, because we're thinking about marketplace lending, peer-to-peer lending. This is really about the unsecured, uncollateralized part of the market, so not borrowing to buy a house, borrowing to buy a car, it's loans that are not secured by anything in particular. The main elements of consumer credit that that's going to mean is the credit card debt and the student loans. Okay, and of course it's going to, there's this other category, is going to come up. Okay, so credit cards. Okay, thing about credit cards, credit cards where do they come from? Credit cards entered our economy like 50, 60 years ago, originally all about convenience. That's maybe why you got a card in the first place. Just convenience. You run up charges during the month, pay at the end of the month. But even if you got it for convenience, at some point you hit a rough patch and it's just not a good time to pay that whole balance if you don't have to, and of course, you don't have to. You can just pay some of the balance and now you're borrowing. Now you're borrowing on your card and you're paying the rate, that maybe you didn't even think much about when you took out the card. What rate would they charge you, if you start running a balance but now you're paying it. Right, and that could be a big number, right. You could be talking about 15, 16 up to 20 percent that you're paying now for that loan that you've taken out by not paying your full balance. Okay. So you're paying a big interest rate on this loan. It's not a collateralized loan. The credit card company has no claim on any particular collateral there, and that's of course that's part of why they're charging you a big rate. So now you've hit a rough patch, you're borrowing on your card, you're paying a big rate, what can you do about it? How can you lower your interest rate? Well, of course, to some extent you maybe can move your balance to another card or to another company once you are balanced and so they'll give you a lower rate. That can happen, and of course that happen, people do that. If that's not so feasible, another thing people have often done is take out a home-equity line. Those home-equity lines we just saw on that graph. So home-equity line. Now you are taking out a new loan which is basically a second mortgage on your house coming in second after your first mortgage. And you can get a nice interest rate that way. Why are you getting a nice interest rate? You're getting a nice interest rate because you've pledged your house. Right, you've pledged your house. You've given a claim on your house to this new lender, that's why they're willing to give you a low rate. But of course the other side of that coin is, now you have increased the risk of foreclosure, losing your house in foreclosure if things go bad, and when things did go bad in the crisis that's of course exactly what happened. So HELOCs if people call home-equity line of credit. HELOCs are a way to refinance out your credit card debt at a lower rate but with that risk, right? So okay. So bear that in mind, we'll get back to that. Let's just think about student loan debt for a second here. So student loan debt has gone way up. You can see in part, to some extent, this is, you can say there's a perspective once that's good news. People are borrowing to build their human capital. The human capital is going to be valuable to them, help them make money down the road. But, even so there's a sense in which it's good news. Obviously that gigantic ramp up in debt does flag that something's not going to plan. People are borrowing money that they have trouble then paying off, and this is going to cause trouble down the road. Now why is the student loan balance growing so much? Well, there's a subtle point here. You might think, well, student loan balance goes up because people keep borrowing. Of course, that's part of it. But an actual, in some sense, bigger part of why it just keeps going up and up and up, is that when students, when graduates hit a rough patch with their student loan, they can, these days, take advantage of what's called income-driven repayment. Income-driven repayment. I'm just going to sketch this. If you want to learn more about it, go to the Department of Education website, they'll walk you through the whole thing. Let me just sketch what income-driven repayment is. What it is, is that if you're having trouble paying your student loan, you can have your monthly payment reduced to a number which is basically 10 percent of your disposable income. Where they take your total income and they subtract out a subsistence amount of income, which is essentially 150 percent of the poverty level. They remove that from your income, look at what's left and they say, okay, 10 percent of that will now be your payment. So you can have it reduced to 10 percent of this discretionary income. But, okay, so your payment is reduced but in fact there's no real forgiveness here at this point. So if the payment you're making is not covering the interest that you owe, then the interest you didn't pay is going to be added to what you still owe. So in fact your balance could be going up. Could be going up while you are on income-driven repayment. It could keep going up and ultimately what happens with that, well what happens is that if you stick with it to 20 years, right, after 20 years, then at 20 years whatever you still owe is going to be discharged. Okay, be discharged so that one is you don't owe it anymore. So your balance can grow over time and eventually there's a discharge. So part of what we're seeing in this growth in student debt, is this dynamic happening. Let me just show you one more graph from the Department of Education website. This is showing you over just a 5.5 year period. Over 5.5 year period it's showing you, with the different colors, the different repayment programs that graduates are in. The green that you see in this graph is people as the total number of dollars in just regular fixed payment repayment program. The purple is people making, what's called graduated payments where they are scheduled to go up over time. The orange, the orange is this income-driven repayment. This is showing you the total number of dollars in income-driven repayment. Notice in just over 5.5 years how much that's gone up. All right, just 5.5 years it's gone up by a few hundred billion dollars. Okay so this is happening in big scale in real time right now, and it's part of why student debt keeps going up, and it's also something to bear in mind when we get to talking about the FinTechs because the thing I want you to bear in mind for yourself is that if you refinance out of your student loan into a new loan from a FinTech, you cannot do income-driven repayment anymore. It's only for people who still have their original federal student loan. Okay. So bear that in mind and just bear another thing in mind, which is that when you take out a student loan in the first place, you and everyone else who took out a student loan at the same time are paying the same rate. Okay, so think about this past. There's this school year that's just wrapping up here at the University of Pennsylvania, we are wrapping up the 2018-19 school year. Well, if you took out a student loan for the 2018-19 school year, then your interest rate was, well I can tell you that if you were an undergrad, your interest rate was 5.05 percent, and if you were a graduate student, it was 6.6 percent. I know that. How do I know that? Because everybody got the same rate, and that rate is calculated off of treasury rates. All right, they follow a formula. They say, okay, when the treasury sold 10-year securities in May, what was the yield at which they sold those 10-year treasuries, right? In May 2018, that yield was three percent. Okay. So okay, three percent. We sold 10-year treasuries at three percent. Okay, so what we're going to do is, for the undergrad loans we are going to add 2.05 percent to that number. Now that's 5.05, right? And for the grad students we are going to add 3.6 percent. So that's how they get to 6.6. So they calculated off the treasury rates. Everybody gets the same rate. There's no risk-based pricing. They're not going to look at you and say, well, I'm a little more worried about you than the other person, I'm going to charge you more. No, everyone pays the same rate. Okay. So once you're coming out of grad's school, everyone borrowed at the same rate but now they're clearly not the same risk, right? Some people got juicy jobs with great salaries, some people are still having trouble, and lenders can look at that and say, okay, this is interesting. We got everyone's paying the same rate but some of these are clearly better credits than others, and that is going to be the opportunity that the FinTechs are going to be kind of feasting on here. So, okay. So just to summarize so far, what have we said? Here we've said that number one, it's easy to slip into owing money on your credit card. Right now, if you look back at that graph is a little just under about a trillion dollars of credit card debt, and those people are very often looking for ways to refinance out of it. You could do the home-equity line, but as we talked about that, that can be worrisome to go that path. Now there's also a trillion and a half of student loan debt now. If you have a federal student loan, you have access to these income-driven repayment. On the downside, if things don't work out so well, if things do work out well, well now, you're paying the same interest rate as anyone else, and maybe that's an opportunity for a FinTech to come along and offer you a different rate. So that's our summary, and in our next session we'll talk about the evolution of peer-to-peer lending to marketplace lending.
