Happy Sunday,
The Fed hiked another 75 bps. Job openings increased. FHA mortgages showing signs of stress. CFPB’s future may be in Supreme Court’s hands. Custodia’s lawsuit backs Fed into corner. OCC to establish Office of Financial Technology. JPMorgan Chase wants to take rent payments online (finally).
In case you missed, last week, PeerIQ released our special report on an emerging set of products consumers are using to manage their cash flow, including earned wage access, small-dollar cash advances, and payroll-linked lending. Give it a read here.
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Rate Hikes May Slow, But Go Higher
The Fed hiked by another 75 bps at its meeting last week. But Fed Chair Powell hinted that the pace of increases could slow, though, over time, the central bank is likely to raise rates higher than previously forecast. At its September meeting, Fed officials forecast hitting a 4.6% rate next year. They didn’t release updated projections at last week’s meeting.
Image: Wall Street Journal
Despite rising rates and chatter of a “technical recession,” the job market remains tight. Total job openings in September rose 437,000 to a seasonally adjusted 10.7Mn. Somewhat perversely, markets now react negatively to this kind of job market news, as it is seen as supportive of the Fed continuing to hike rates.
FHA Mortgages Showing Signs of Stress
Rising defaults for FHA mortgages may be a “canary in the coal mine,” analysts suggest. The government-insured mortgages are among the riskiest. Borrowers using FHA mortgages tend to have lower incomes, more debt, and smaller savings cushions.
The rate of early payment defaults on recently issued FHA-backed mortgages has doubled over the past year. For borrowers with credit scores of 550 or lower, nearly one-tenth were in early default vs. just 4% at the start of the pandemic.
Because of their greater financial fragility, FHA borrowers are more susceptible to changes in the job market. Rising default rates could reflect changes in employment, such as reduced hours, that aren’t reflected by the employment rate. Inflation could also be playing a role, as household budgets are increasingly stretched to buy essentials.
What Does the CFPB’s Future Hold?
After a three-judge panel from the 5th Circuit Court of Appeals found the CFPB’s funding mechanism unconstitutional, industry watchers have been left guessing what’s next for the consumer protection agency.
While it is possible the bureau could seek a review of the decision by the full 5th Circuit, analysts think that’s unlikely, given the unfriendly makeup of the court. Seven of the 16 judges on the 5th Circuit have already expressed their opinion that the bureau is unconstitutional.
Instead, the CFPB is more likely to seek a review by the Supreme Court. It’s impossible to predict how the case may fare before the court. The Supreme Court previously ruled the bureau’s single independent director structure was unconstitutional but left the agency itself intact.
This time, should the Supreme Court take the case, things may be more complicated. That’s because the funding mechanism in question could have implications for other “self-funded” agencies, including the Federal Reserve, the OCC, and the FDIC. While opinions on the funding question vary, few are predicting the Court would invalidate the agency altogether or its historical actions.
Custodia Bank’s Lawsuit Backs Fed Into Corner
Custodia (formerly Avanti), a “digital asset bank,” initially sought a Fed master account two years ago. It has yet to get a decision on its application. As delays stacked up, Custodia eventually sued both the Federal Reserve Board and the Federal Reserve Bank of Kansas City (the Fed bank responsible for reviewing Custodia’s master account application), seeking a decision on its application. The Fed sought to have the case dismissed, arguing Custodia’s business model was the “first of its kind,” and that it needed more time to review the matter.
But the judge in the case wasn’t buying the argument. Now, the Fed is left with two unappealing choices, either of which could set a precedent: either grant Custodia’s master account or let the matter go to trial.
Should the case go to trial, the Fed would almost certainly have to disclose documents and correspondence that would shed additional light about master accounts and its process for granting them. This is information the Fed has historically kept close to its vest, with much of what is known have come from previous lawsuits.
OCC to Establish “Office of Financial Technology”
The OCC recently announced plans to establish an Office of Financial Technology next year. The new Office will build on and incorporate the existing Office of Innovation, which the OCC established in 2016.
In the announcement, Acting Comptroller Michael Hsu said: “Financial technology is changing rapidly and bank-fintech partnerships are likely to continue growing in number and complexity. To ensure that the federal banking system is safe, sound, and fair today and well into the future, we need to have a deep understanding of financial technology and the financial technology landscape.”
The move to establish the Office comes as OCC scrutiny of the fintech sector in general, and “banking-as-a-service” models particularly, has increased significantly. As banking becomes less integrated, it has become increasingly difficult to tell where the ‘bank’ stops and a ‘tech’ company starts, the OCC has argued.
JPMorgan Chase Wants To Digitize Rent Payments
Tired of writing out a rent check to your landlord each month? Given the U.S.’ highly fragmented rental market, in which many units are owned and managed by “mom and pop” landlords, writing a physical check to pay rent is still shockingly common.
That’s the opportunity JPMorgan Chase is seeking to tap into with a new platform it’s piloting for property owners and managers. The service is designed to automate the invoicing and receipt of online rent payments. Chase hopes to attract landlords to the platform by offering data analytics, including to help owners determine how to set rent levels, plan for future investment, and screen potential renters.
Despite Macro Concerns, Some Bright Spots as Earnings Season Continues
Block, Robinhood, LendingTree, and SoFi rose after beating earnings estimates. Coinbase rose, despite beating earnings, as it lowered expenses and retained more users than analysts expected. Rocket and Curo fell after missing earnings estimates, and PayPal fell after cutting its revenue forecast for the fourth quarter.
Source: PeerIQ
Last week we reported that many lenders saw their originations decline, due to rising interest rates. However, SoFi continued to grow its originations, up 9% sequentially, driven by record personal loan originations. SoFi borrowers do have a stronger credit profile than lenders that serve subprime lenders, with its personal loan borrowers holding a weighted average FICO score of 746. SoFi emphasized that it has greatly benefited from its bank charter, allowing for a lower cost of funding for its loans. Additionally, close to half of SoFi Money customers are setting up direct deposits within a month (up from 37% in Q2), driving higher deposits.
Despite missing earnings estimates, Curo Group was able to increase its gross combined loans receivables by 4% from the second quarter. Curo Group’s U.S. NCO rate dropped to 3.9% from 11.0% in Q2, but this was the result of the sale of its Legacy U.S. Direct Lending business, which shifted its loan portfolio mix to lower loss-rate products.
PayPal processed close to $5Bn in BNPL volumes, up slightly from the second quarter ($4.9Bn) and up over 150% YoY. PayPal management noted it has seen no observable deterioration in its loss rates, attributing this to the fact that it has history on 90% of its BNPL users.
Block reported $5.4Bn of GMV for its BNPL platform. Building on its BNPL platform, Block rolled out the first iteration of Discover, a tab that allows consumers to search for people and businesses and find BNPL offers from marquee Afterpay merchants. Block’s Square Loans (facilitating loans to square sellers) originated $1.14Bn for the quarter, up 13% sequentially.
Robinhood beat estimates, and has continued rolling out additional features. For one, Robinhood rolled out the beta version of Robinhood Wallet, a self-custody, web3 wallet to the first ten thousand customers on the waitlist. Additionally, it expanded its coin listings, adding USDC, Cardano, Uniswap, Stellar Lumens and Avalanche. CEO Vlad Tenev also announced that the company planned to launch Robinhood Retirement before the end of the year, offering retirement accounts to its users.
During the quarter, Coinbase announced a strategic partnership with BlackRock to provide institutional clients with direct access to crypto through connectivity with Coinbase Prime. Coinbase also announced a strategic partnership with Google Cloud enabling select Google Cloud customers to pay for their services via select crypto facilitated by Coinbase Commerce.
Rocket Companies saw its closed loan origination volumes (purchase loan + refinancings) of $25,578Mn, a (26)% decline sequentially. This comes as no surprise, as rising rates have greatly impacted the mortgage market. Total mortgage applications are at the lowest levels since the mid-1990s, even lower than the 2008 financial crisis. Additionally, CEO Jay Farner noted that, “Housing affordability is at a 30-year low and weakening consumer sentiment is leading to a rapidly deteriorating home purchase market.”
LendingTree onboarded Upgrade as a new partner onto its TreeQual platform, as both a credit card issuer and personal lender. LendingTree announced that it recently eliminated 200 roles at the company.
In the News:
Higher Interest Rates Fuel Losses at the Federal Reserve (Wall Street Journal, 10/31/2022) Rate hikes have led to the Fed paying out more in interest expenses than it earns in interest income.
Durbin 2.0 Threat: Banks & Credit Unions Brace for Significant Impact (The Financial Brand, 10/31/2022) The ICBA said “This technological upgrade required would be subsidized by all in the payments stream, not just those over $100Bn in assets”.
CFPB Seeks More Public Input on Big Tech Payment Platforms (American Banker, 10/31/2022) The CFPB issued a second request for public comment on big tech companies and online payment platforms.
Does B2B BNPL Have the Potential to Emerge as the Next Top Fintech Trend? (Tearsheet, 10/31/2022) Research shows that 50% of B2B buyers would prefer a payment option other than a credit card when purchasing for their company.
American Express and its Rivals are Stocking up on Tech Talent (American Banker, 11/1/2022) While some tech companies are cutting back, Amex, Visa, Mastercard, Discover are hiring.
BlockFi Selects Stripe for Global Payments Platform Integration (BlockFi, 10/31/2022) BlockFi announced selection of Stripe to build fiat-to-crypto solutions for BlockFi’s platform.
Adyen Adds Small-Business Credit to Take Share from Banks, Fintechs (American Banker, 10/31/2022) Ayden’s latest financial service will lend to small businesses.
Lighter Fare:
Scientists Invent ‘Quantum Watch’, a Mind-Bending New Way to Measure Time (Vice, 11/1/2022) Not your typical Casio.