US Yield Curve Inverts; New Products from FinTechs

By Vy Phan

March 24, 2019

Greetings,

For the first time in 3,000 days, and with much anticipation, the 3-month and 10-year treasury curve inverted. The median time to a recession after this curve inverts is between 1 to 1.5 years. However, unprecedented interventions such as QE (and higher central bank holdings globally) make it difficult to draw hard and fast conclusions. Market participants are pricing in a 41% probability of an interest rate cut in the September meeting.

Source: PeerIQ; Bianco Research

In regulatory news, the SEC is investigating Direct Lending Investments over material misstatements of the valuations of one of its investments. Direct Lending lent to mid-cap companies and overvalued its investment in one of its borrowers who defaulted. The trifecta pattern of a liquidity mismatch, Level 3 holdings, and investor redemption/subscription activity made the Direct Lending fund prone to misstatements. The SEC has stepped up enforcement actions on direct lending funds and you can read about our prior analysis on this topic here. Do reach out to learn how PeerIQ can help you with regulatorily-compliant valuations.

ICBA Takes on Square

The Independent Community Bankers of America are seeking to block FinTechs from receiving FDIC insurance if they obtain Industrial Loan Charters. The group contends that such a charter will allow FinTechs to operate nationally without any supervision from the Fed. Square has reapplied for an ILC and has received until now limited pushback on its application. Meanwhile,

LendingClub is considering filing an application with the OCC to operate as a national bank.

New Products from FinTechs

FinTech innovation continues with new products from PeerStreet and Figure. PeerStreet has launched a 30-year loan to enable private investors to buy rental properties. Residential for Rent loans are targeted towards rental home operators. The rental market in the US has grown exponentially post-crisis people struggle to buy homes. The number of rental homes has grown from 36 Mn in 2006 to 43 Mn in 2017.

Source: FactTank, PeerIQ

Figure is launching Figure Home Leaseback, a reverse mortgage product which allows homeowners to sell their homes to Figure and continue to live in place as renters. This new product complements Figure’s Home Equity Line of Credit.

Industry Update:

Treasury Yield Curve Inverts for First Time Since 2007 (Bloomberg, 3/22/19). The 3-month and the 10-year treasury curve inverted for the first time since 2007. The median time to a recession after this curve inverts is 1.5 years.
Direct Lending Fund Founder Resigns Amid SEC Investigation (Bloomberg, 3/20/19) The SEC is investigating Direct Lending Investments over material misstatements of the valuations of one of its investments.
Banks seek Congress’ help to block fintech path to ‘industrial’ charters (Roll Call, 3/201/19) The Independent Community Bankers of America are seeking to block FinTechs from receiving FDIC insurance if they obtain Industrial Loan Charters.
More regional banks may merge to meet tech challenges (American Banker, 3/19/19) A big reason for regional and community banks to join forces has been to develop technology that will help them compete in today’s digital banking world.
Investors should encourage a resurgence of local community banking (CNBC, 3/16/19) Community banks are the lenders of choice for small businesses and their shrinking numbers create opportunities for investors to start new ones.
Madden lawsuit nears end, but online lenders still seek fix from regulators (American Banker, 3/18/19) The original Madden suit is ending but broader regulatory issues have still not been addressed.
Are regulators close to consensus on CRA reform? (American Banker, 3/18/19) FDIC chair Jelena McWilliams and Fed governor Brainard clarified their approach to overhauling CRA.
LendingClub Eyes National Bank Status (Politico, 3/18/19) LendingClub is considering filing an application with the OCC to become a national bank.
FIS’s Worldpay Deal Ratchets Up Race for Payments Companies M&A (Bloomberg, 3/18/19) FIS will acquire Worldpay for $ 35.5 Bn, the biggest deal ever in international payments, just two months after Fiserv agreed to buy First Data for $22 Bn.
BlackRock to Buy Risk Platform EFront in $1.3 Billion Wager (Bloomberg, 3/22/19) BlackRock agreed to acquire French software provider eFront to expand private equity and real estate analytics, complementing its Aladdin platform.
Investors in credit are backing hammers that see only nails (FT, 3/21/19) The flow of private credit into corporate loans is systematically underpricing risk.

Lighter Fare:

NASA Spacecraft Zooms Past Ultima Thule (WSJ, 1/1/19) New Horizons has made it one billion miles past Pluto, the farthest a human spacecraft has ever traveled.