Tracy Alloway (2:09)

See mintmobile.com.

Joe Weisenthal (2:13)

Bloomberg Audio Studios podcasts ra. Hello and welcome to another episode of the Odd Lots podcast. I'm Joe Wiesenthal.

Tracy Alloway (2:34)

And I'm Tracy Alloway.

Joe Weisenthal (2:35)

Tracy, I feel like I just do not have any feel right now on like the state of the consumer really. I mean you hear K shaped economy, labor markets slowing down. Then it's like lowest layoffs in years. You go outside, everything looks booming. Like I just have no feel right. I know consumer sentiment is terrible, but consumer sentiment is terrible for years and people keep shopping. I have no sense of it.

Tracy Alloway (3:00)

Right. Well, consumer sentiment actually came in higher than expected most recently. True, big surprise. But I was going to say, are you not out shopping for Christmas presents?

Joe Weisenthal (3:10)

It's insane, right?

Tracy Alloway (3:10)

Yeah, there's a lot of people buying a lot of stuff.

Joe Weisenthal (3:13)

Buying a lot of stuff.

Tracy Alloway (3:14)

But I think this gets to the K shaped economy point, which is if you have a cohort of wealthy people who are buying more, if you it more than offsets the lower income people who are buying less at lower prices. So it's really hard to tell.

Joe Weisenthal (3:30)

It's really hard to tell. One thing that definitely feels different, if you look at aggregate measures of household balance sheets, like this is something that is very different than sort of like pre grade financial crisis. The general view is that the American consumer or the American household is, has a very big cushion. There is a lot of home equity built up. That is not a thin layer. Obviously anyone with money and any sort of investment account has done phenomenally well. We're recording this December 12th. Yesterday, I think the S&P 500 hit yet a new all time high. So if you have any sort of home equity buildup, if you have any sort of investment, you are doing very well. On the other hand, of course, people are stretched from years of inflation. We know that hiring has slowed down. We know that, you know, we see these headlines, delinquencies for cars have like shot up. But I've been seeing these headlines for years. I don't totally know what they mean or how apples to apples they are with the past. I just don't know. I just, I'm very confused.

Tracy Alloway (4:30)

Yeah. You know what's really interesting to me just from a financial perspective, if you look at some of the bonds that were actually built on consumer loans, the weakest ones are now from the like 2020 to 2022 period.

Joe Weisenthal (4:46)

Oh, see, this is another interesting element of measures like delinquencies and why I sort of wonder like how comparable they are. Because okay, partly a delinquency measure is a snapshot of a moment in time. Right. A snapshot of health. But it also inherently reflects something in the past because it reflects, you know, what were lending standards at the time.

Tracy Alloway (5:07)

Right, exactly.

Joe Weisenthal (5:08)

So.

Tracy Alloway (5:09)

And that was a period of low interest rates.

Joe Weisenthal (5:11)

Everything was booming on Wall Street. Booming. Yeah. Give money to anyone. Anyway, we need to get a better picture of exactly what's going on. How stressed is the consumer? How much do these delinquencies just reflect the profligacy of lenders during the boom times when rates were nothing, et cetera. And yes, we need to figure this out, especially we're in the middle of shopping season and all that stuff. So I'm very excited to say we really do have the perfect guest. We're going to be speaking with Ricard Bondabo. He is the Executive Vice President, Chief Strateg Officer, Chief Economist, advantagescore, a credit scoring company. Ricard, thank you so much for coming on the podcast.

Ricard Bondabo (5:48)

Thank you for having me. It's an honor.

Joe Weisenthal (5:49)

What is VantageScore, a US credit scoring company? What do you do there?

Ricard Bondabo (5:54)

So we're the largest credit scoring company in the United States and we were founded almost 20 years ago by the three credit bureaus, TransUnion, Equifax and Experian. And we were sort of created with a very specific mission in mind to drive greater competition and credit scoring. Prior to us, there really wasn't a lot of choice in this space. We were also there to drive more innovation and the most predictive scores, which was a big ask from the banks at the time, and also to be able to expand access to millions to enable everyone who really is credit worthy to be able to get access to credit products.

Tracy Alloway (6:24)

You mentioned the banks just then. Can you expound a little bit more on your customer base?

Ricard Bondabo (6:29)

Yes. So we used, obviously the primary use case that most people think about when it comes to credit scores is for lending, right. When you know you're applying for a loan and they want to evaluate whether or not you're going to be able to perform on that loan, they'll often pull your credit score as part of that process. But it's used in many other stages as well. So for instance, many people who are applying to rent in a new apartment building may also get asked for it. When you are trying to get a utility bill, definitely in New York, you.

Tracy Alloway (6:54)

Get asked for it.

Ricard Bondabo (6:55)

Yes, you certainly do. And utility bills, telephones, anything that involves a long term commitment on payments generally. Now you'll often get asked to provide your credit score.

Joe Weisenthal (7:04)

So just to explain further, you were started by whom 20 years ago?

Ricard Bondabo (7:08)

We were at a joint venture by experian, Equifax and TransUnion, the three national credit reporting agencies.

Joe Weisenthal (7:14)

So what did, what is the difference between these major, major companies that we've all heard of that provide a credit score, et cetera, that they such founded. You like, what do you do differently than them?

Ricard Bondabo (7:25)

Well, so what they do is they're the ones who collect all this data from lenders and others on your credit performance.

Joe Weisenthal (7:32)

Right.

Ricard Bondabo (7:32)

So they're called credit bureaus. They collect that, they're highly regulated. But then most lenders can't just make sense of all of that data on its own. They need some guidance to help to translate that into what does that mean? Right, okay. And so that's where a scoring algorithm comes into effect. Right. And so the scoring algorithm helps to take in all these hundreds of different factors about you to try to then determine what does that mean about your propensity to pay.

Tracy Alloway (7:56)

Okay, you mentioned predictive analysis as well. What exactly is that and what's that based on?

Ricard Bondabo (8:01)

Well, so when credit scores are created, right, the aim, the goal is to try to evaluate what is the likelihood of somebody's going to default on a payment over the next 24 months. So when you see that score, the score is actually a translation of a probability, right. Or an odds, right. To evaluate what is that risk.

Tracy Alloway (8:21)

And how did we end up with the system of FICO scores in the US because it has like an interesting history.

Ricard Bondabo (8:27)

Well, back in the day, Fair Isaac, they created the first sort of known credit score. They were the first ones to realize that there was a.

Joe Weisenthal (8:35)

Is that what the FI on Fair Isaac, is that fico? Oh, okay, yes.

Ricard Bondabo (8:40)

And so let's go back a bit. Right? So in the old days, lending was not necessarily the most fair system that there was. Right. When I call up your previous employer, they may call your landlord, they may just ask around, and if they don't know anything about you, you know, there was a lot of judgment involved in.

Tracy Alloway (8:57)

Lending, a lot of racial discrimination as well.

Ricard Bondabo (8:59)

Well, there certainly was built into that system, Right. And so then there was a law created, the Fair Credit Reporting act that said, like, you can't do that. You need a better system that is fair and that is a better quantitative ability to assess people's risk. Right. And that created then this need to be able to consolidate all this quantitative information in a way that lenders could easily use it. So FICO was the first Fair Isaac at the time, was the first to create that. And they did very well doing so. But, you know, then there was a need for competition, innovation. And there was a lot of frustration around the time of 20 years ago that there was only one game in town and it didn't score about 20% of the US population. It still doesn't. And then a lot of lenders were felt frustrated, like, if it doesn't work for 20% of the population, there's a problem. We need something different. And so then bureau took the unusual step of actually coming together to create an alternative and that became Vantage Score.

Joe Weisenthal (9:50)

Interesting.

Tracy Alloway (9:51)

Can I as a consumer go credit score shopping?

Ricard Bondabo (9:55)

So first of all, there's different ways to use it, Right. So a lender will typically choose the credit score that they're going to use for being able to underwrite a loan with you. And often they'll use many more factors than just a simple credit score. Right. Particularly the more sophisticated ones. However, when you're trying to understand what your situation is, you can, there are lots of different places you can go. You can either go to the credit bureaus, you can go to the likes of Credit Karma. There are many different services out there.

Tracy Alloway (10:19)

But I can't force the lender to look at a specific score. Yeah, look at this one over here. It's great.

Joe Weisenthal (10:24)

Get a second opinion.

Ricard Bondabo (10:26)

No, I'm afraid not. That's not how it works. It's, it's really, you know, the lenders try to determine what is the most appropriate score for their product. And there are many, many different scores out there. There are scores that are in some cases built specifically for types of products like auto loans and the other scores that like our schools, that are generic, that can be used for any type of product.

Joe Weisenthal (10:42)

So you collect more data and you mentioned that there is this wide swath of the population that wasn't being captured by the credit bureaus. What do you do additionally on top of them to expand the pool, find potentially credit worthy borrowers that they had been missing before.

Ricard Bondabo (11:00)

So the thing is that the quality and the types of data that's been collected by the credit bureaus has improved significantly over time.

Joe Weisenthal (11:07)

Okay.

Ricard Bondabo (11:08)

And so when we started creating our algorithms, we're in, you know, the current version that's now being adopted for mortgage is the version four. We're releasing version five this year. We actually go and rewrite the whole thing each time so that each time we can come up with the most accurate way based on the current data available and our current ability to understand how consumers are behaving because that behavior changes over time. Other companies, what they've done is they built a model a long time ago. They don't like to necessarily reveal to everybody how it works. The secret sauce, right. So when you're seeing there's a chief risk officer and there's a new model coming along, either you want to understand that it's going to behave very similarly to the previous one to be okay with it, or you need a lot of transparency in how it works so you can get comfort in this new model. So I think there's the big divergence in strategy. We go Back to boots and redo everything from scratch each time, but in the same time provide an awful lot of transparency and a lot of tools so that lenders can get a really good understanding of exactly how this is going to work and how it's going to behave in different situations. And they can test it out. Right. Whereas the other one is still working with many limitations that have been in place since the very first models. And because of of those limitations, that's a big difference in why we score a lot more people. So I'll give you a very concrete example. So, for instance, one of the limitations that the others have is that if you haven't had any credit activity for the past six months, that you're not going to get a score. So you could just imagine somebody that works for the military, has been deployed overseas or anything else. Right? But the good thing is, starting about 15 years ago, the bureau started collect and storing data so we could use time series data. Because who'd have thought that time series data could be useful in prediction, right? Completely strange idea. Right? So With Vanish Group 4, we started using trended data, time series data, and with that, obviously we can see back 24 months. So yes, if there's a gap in six months of history, it's important, but we're still able to see what happened before then. Right? And that gets rid of tens of millions of people when you have that constraint, there are the constraints in there too. So people that are new to credit, so if they haven't had a full six months of history, again, they won't get scored. If there aren't any trade lines, they won't get scored. Right. And so what we've been able to do is to deal with those constraints in a different way by A, using time series data, B, using some other data points. So we were the first to use utility payments and rent. I mean, who'd have thought that your ability to pay your rent could somehow again be useful in trying to assess your risk, right? And so including those new different types of data, realizing that these constraints can be changed now that you have time series data, but then also guess what, you know, math has evolved as well, okay? And so, you know, what we realized too was that you can be really smart and use some new methods, like some AI methods, for instance, like clustering, to really understand, well, look, here's a group of people and they behave in a certain way. And by doing that in a better way, we can then figure out what is the best way to measure this group of people here versus this group of people here. And doing that well enables you to build much more predictive scores. And so that's an important yance too that not a lot of people always realize is that it's not one formula that's calculating everybody's score. People will get depending on what their credit file looks like and their history looks like. They'll get divided into, you know, different segments and then each segment is scored according to that. And that again increases the ability to score people accurately and score more people. Like in our case, it's 33 million more people that were able to score. So it's quite substantial.

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Tracy Alloway (17:55)

How do the models deal with breaks in previous consumer patterns? Because we have seen some major ones in recent years. So after the pandemic, we had a phenomenally tight labor market and we saw a lot of wage growth for lower income, a lot of spending that was sort of unprecedented in many ways. How do models actually incorporate that sort of big shift in the trend?

Ricard Bondabo (18:20)

So I think that's something really important to try to understand, and it's not easily understood by many. So give me a second here. I'll try to break this down.

Joe Weisenthal (18:29)

When people say, give me a second, I have to break this down. Please break it down.

Tracy Alloway (18:33)

You can have a minute.

Joe Weisenthal (18:34)

You can have a minute.

Ricard Bondabo (18:35)

Honestly, that's kind of what I enjoy most about listening to your podcast. And so look, the first thing to understand is that this credit score is not an absolute measure of risk. It's a relative measure of risk. Let me break that down for you. Right? So what it means is that, you know, a score, if somebody has a score of 720 in one month and then somebody else has scores 723 years later, the risk will be different. And the reason for that is very deliberate. When we are evaluating a person because of the laws of the Fair Credit Reporting act, we're allowed to look at the things that are about you. But there are things that are going on at the same time in the economy that impact risk of the population as a Whole. Right. So that's why it's so important when you're looking at things like credit scores to understand when was that score pulled? Right. Because the score of 720 in 2017 had a very different characteristic of a score of 720 in 2022.

Tracy Alloway (19:33)

Okay.

Ricard Bondabo (19:34)

Now, but the thing to bear in mind is it's an excellent relative measure of risk. So at any one given point in time, you know, somebody with a 720 is going to be much better performing than somebody at 630, and the same time, somebody at 840 is going to be much better than both of them. Okay. And that holds consistently true. And so that's why it's very important to include when you're making lending decision. But lenders have to be thoughtful, right? They have to as they're making decisions about, you know, how many people they want to be able to underwrite and how to think about risk, they need to also start thinking about these external factors as well so that they can then set their underwriting criteria to meet the kind of level of risk that they're willing to take on.

Joe Weisenthal (20:13)

I had never thought about this, but of course that makes so much sense. So it's like I could have an excellent credit history, I could have ex employment, pay all my rent. But for example, if the economy is going down the tubes, I may still yet be a risky credit because I may lose my job at some point. And so this idea that it kind of has to be relative because the underlying conditions that affect everyone, they're outside of our control, but they are still important from the perspective of the lender.

Ricard Bondabo (20:43)

Exactly. And at the same time, if you get declined for a credit card, you can't be told that the reason you're getting declined is because unemployment has hit 5%.

Joe Weisenthal (20:52)

Okay.

Ricard Bondabo (20:53)

Right. That doesn't work. The laws are very specific. The reasons for why you're not getting the top score have to be explained and they have to be based on attributes and data, obviously that are specific to you.

Tracy Alloway (21:03)

What's the most important external factor when it comes to credit scoring? Because I've heard arguments for, obviously the labor market, the unemployment rate, but also wage income and therefore real disposable income. How do you weight those different factors?

Ricard Bondabo (21:18)

I mean, I think if you're a lender, it's going to really depend upon what types of consumers you're lending to. Right. Particularly now we're seeing such divergence across consumers in terms of who's doing well and who isn't. And so, for instance, if you are a lender focused on people that are kind of below prime, let's say that not completely subprime, but that near prime group and you're focusing on auto loans and you're in regions like Texas or in certain areas, then obviously understanding the economic conditions that are affecting those people, like a lot of those people would be working in certain types of industries. What is employment like in those types of industries? Right. Or is it people that are in the gig economy? Right. And so it is quite nuanced. It's not necessarily one thing and it's going to depend. Whereas on the other extreme, you know, if you're handing out black cards and your audience is incredibly affluent, then again it's less about the risk because at that point your risk of default is probably 1 in 10,000. So they're just trying to make, you know, sure that it is absolutely risk free.

Tracy Alloway (22:19)

Right. So someone in a highly cyclical industry, like, I don't know, truck drivers in Texas or something that were taking out auto loans would probably be seen as riskier or the labor market would depend more for them. Whereas if you're taking out a black AMEX card or something like that, probably real disposable income.

Joe Weisenthal (22:39)

Yeah. Okay, so you mentioned different segmentation. People talk about this K shaped economy. Is that real or is that a meme?

Ricard Bondabo (22:46)

I absolutely believe so, but I think that it's a little bit more nuanced.

Joe Weisenthal (22:50)

Okay, good.

Ricard Bondabo (22:51)

And so one of the things that we spotted late last year and we're tracking into this year was that we weren't the first to see that it was a K shaped economy. But a lot of people were making the assumption that the K shaped economy was being driven by income levels. But when we were looking at the data at the time, we were seeing that those that were in the higher income level, in our case that's 150,000 above. So that's not your people who are running hedge funds. But still it's the relatively better to do cohort. They were actually seeing the highest year over year increases in delinquency rates at the time.

Tracy Alloway (23:23)

Time.

Ricard Bondabo (23:24)

So we knew that. Okay, hold on a second. It isn't as simple as this. So you know, we spent a lot of time and so a lot of banks and we kind of collaborated with them to try to understand what's really then the differentiator. And then what seemed to be really a part of this is wealth. So you know, a lot of people don't necessarily differentiate income and wealth, but they are separate. And so you Know when you're looking then at a high income cohort at the time to try to see like, okay, well, which ones are doing well, which ones weren't. Homeownership was the biggest differentiator because they had a bigger cushion, something they can rely on. And then obviously other aspects as well, like stock ownership and small business ownership, et cetera. But home ownership is the one that has the bigger effect because there's more people in the US economy that own a home and then, let's say, has a stock portfolio.

Tracy Alloway (24:10)

Talk more about mortgage rates because this feels pretty key when you're talking about the K shaped economy, which is if anyone, anyone who bought their house before 2020 is probably a very lucky person and has locked in a low mortgage rate. I think mortgage rates are still, even after the rate cut were at like 6% or something versus I think at one point they got down to like.

Joe Weisenthal (24:32)

3% right after the people like 2 1/2% mortgage.

Commercial Narrator (24:36)

Crazy.

Tracy Alloway (24:36)

Yeah. And so if you bought a house then you actually have this like massive cushion, as you put it, versus someone who's buying a house now or in the past couple years, in a way.

Ricard Bondabo (24:47)

I see there's a bit of a silver lining when it comes to housing. Right. We have seen rates come down this week. Hopefully they will continue to come down next year. There's a lot of debate obviously, even within the Federal Reserve as to exactly the speed at which that's going to be accomplished. And obviously there are many other factors that can impact that. But the reason we see a silver lining is for two reasons. Okay. As interest rates comes down, obviously for people that own homes, that's their biggest monthly payment. Right now there's no much point for many to refinance given where the interest rates are. But if it comes down a bit more, it'll make much more sense for a large tranche of homeowners that have higher interest rates to be able to make that switch. So we'd expect a bit of a refinancing boom as it hits a certain level. But the other thing that's really exciting about what's happening in the homeownership space is that this year the FHFA changed the rules about what credit scores can be used in mortgage. So historically they've used a very old version that's from the 90s of the classic scores in mortgage applications. And that was actually not deliberately done. So it was just that it got written into the rules and then since then, as a recommendation. But then it became kind of the de facto a monopoly in that space. And the problem is that's a model that went through the last crisis and the Federal Reserve of St. Louis actually found that it didn't work well at all in that situation. In fact, it saw a bigger rate of increase in delinquencies amongst those that were prime than it did amongst those that were subprime. So the rate of increase, which is not how a model's supposed to work, surprisingly. Right. And so. So what's happening now is that they have allowed for Vana 4 to be used. And the reason I say that is a. Because as I mentioned before, a lot more people will now have the ability to get access to home ownership. So that will create a bit more demand. Right. Which is great. And the other thing to think about too is who are these people that get access to this? Right. It's a lot of people that are not necessarily in the areas that have been so crazy with house price increases. Right. There are a lot of rural communities like. So if you look at the state where there's the biggest difference between scorable people with the new war, it's actually West Virginia. And so those economies could certainly do really well from a change to more people having home ownership. And then the second thing too is obviously RMBS is really important. Had some challenges back in 2008, 2009. Right. And so having a better performing model.

Tracy Alloway (27:07)

That'S a very modest way of putting it.

Joe Weisenthal (27:10)

I've heard about those challenges. I think they came up a couple of times.

Ricard Bondabo (27:13)

I was educated in the uk. Pardon me. We have a tendency to understate things. But so. So having a newer, more proven model, one that's worked so well in credit card and other things for the past eight years, it's become the most used model in many other segments. So having a proven model that's newer and more predictive should help as well with reducing the systemic risk in the RMBS market.

Joe Weisenthal (27:34)

Just to go back very quickly because it sounded important, can you just clarify a little bit more? What is this rule change such that could unlock additional source of demand here.

Ricard Bondabo (27:46)

Okay. So when a bank before wanted to submit loans to Fannie Mae and Freddie Mac, they could only submit those loans using the FICO Classic score.

Joe Weisenthal (27:55)

Okay, okay.

Ricard Bondabo (27:56)

Which is actually two, three different scores go into that another point. But anyway. And there used to be like a cutoff that if you didn't have 620 then you couldn't be able to submit it. You could go to an FHA loan, but those are more expensive. Right. But you Couldn't necessarily get a normal conforming loan that goes to finding mail 40 Mac. So that's not changed. First of all, that minimum limit of FICO has been removed and now they are just updating all the pipes to allow them to use varnish score as a choice. So now there'll be a choice. Lenders can choose which score they want to use and they can make their own evaluations about which one performs better.

Joe Weisenthal (28:27)

Okay, so let's go back to starting at the end of last year and you saw that increase in delinquencies among people with decent incomes. Maybe they didn't have as much wealth. Talk to us about the numbers. How big were these numbers? How much did they catch people by surprise? And what is the story? There's about why there was this delinquency pressure.

Ricard Bondabo (28:45)

Well, so the good thing is it's evolved a bit since the end of last year. But you know, when we're looking at this data, then again, look, high income earners, not surprisingly, have lower delinquency rates than middle income earners and that had themselves lower delinquency rates than the lower income. Right. But not a lot of people were looking at that kind of year over year trend and the momentum, Right? I'm always looking at momentum because I'm trying to get an early read on kind of how things are developing. And so at the time, actually let's go back a little bit because I think it can explain a little bit more about what's going on in the economy. Is that all right?

Joe Weisenthal (29:18)

Please.

Ricard Bondabo (29:19)

So when the pandemic happens, right, A lot of stimulus comes in, a lot of forbearance programs are put in place. And as a result of that, so many people's credit health and the way that they appear on the credit files improved dramatically as they were. They were paying down their credit cards, they were building up their savings. It was a good situation, temporary, but good. But then 20, 21, 22 starts creeping in and we start seeing that, okay, this is not a persistent situation. This was a one off, right? And we started seeing delinquency rates starting to come up again, right. What we saw, which shouldn't be too surprising, particularly given that that was when inflation was kicking in in a big way, was that those that were initially impacted and who were seeing the biggest rises were the lower income households. Right? So for the first sort of, you know, six months, nine months, that was the group that was seeing the biggest year over year increases. But then what we started seeing was that come 2023 forward we actually started seeing that then the middle and higher income households were starting being impacted too. And that's probably related to the fact that lower income households had less disposable income, but they also had less savings put away so that, you know, they're the first to feel the pain. But then when there is this consistent imbalance between your inflows and your outflows, right. Even if you have, you know, 30,000 or 50,000 that's put away, that's going to start depleting. And that's what we started seeing happening even with these higher income households. Because at the same time, you know, they were hit by so many pressures, right? Biggest rent increases I think we'd ever seen came into effect those few years after Covid. Right. We saw things on, you know, car prices, costs of auto financing going up through the roof, and then various other costs also went up substantially. And so it's not that higher income people were immune from this. Right. Also, as an economist, a lot of people always talk about, hey, when inflation kicks in, it disproportionately impacts lower income households because the cost of bread, the cost of milk, et cetera, it's not like high income people buy milk that's 100 times more expensive. Right. But the reality is, if you look at people's big outlays, many of those actually scale with income. Rent, for instance, people that earn more tend to rent higher. Other big outlays such as childcare, education and other things, they also have been scaling more with income. Now, obviously there's a level of income that, you know, that, that does not apply to. But if we still talk about that cohort 150 to 250 or so of household income, they're definitely seeing that. They felt the pain too. It took them longer before it started impacting their delinquencies, but they did start feeling the pain. Pain. The good news though is that as we started looking at the second half of this year, right, so we still saw those delinquencies and high incomes rising very heavily at the beginning the first half of this year, but since July, and I've got data from October, so of the three of the four months since July, we've seen that higher income households came down. So that's a good sign. And the reason I say that's a good sign is not because I'm a fan of, of making the K shaped economy even more so, but the fact that so much of the US economy is driven by spending. You mentioned earlier that high income households disproportionately impact that. And so if that dries up, that has a knock on effect on the whole economy. So the fact that we're seeing that cohort, that those delinquencies are starting to come down, I think there's some light at the end of the tunnel.

Joe Weisenthal (32:52)

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Ricard Bondabo (36:28)

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Tracy Alloway (36:30)

I always wondered how useful are big shopping events like Black Friday or Christmas in terms of gauging consumer sentiment? So you always see the headlines. You certainly saw them this year. You know, record Black Friday spending. But then you also see people break down that spending and say, well actually it's because everyone is so pressured, they really need the low prices so they're buying everything. Now how useful is something like that to you?

Ricard Bondabo (36:56)

You can always see trends, right? And so from one perspective, it's always good to look at a number of different things such as spending on Black Friday, Cyber Monday, et cetera, because there are nuances into how people have been spending for those weekends over 20 years. But still, if you look at the last three years, you can start to see things that are happening. But the thing that I haven't been able to get my head around is how much of that year over year increase in spending on the holidays is driven by the prices of the goods going up versus people buying things that would have traditionally been more expensive or splurging more. That for me isn't obvious. And I think that again, when trying to understand how the economy is going, it's so important if you're looking at from a spending perspective to actually look at the different merchants, right? So how's McDonald's doing? What are the trends there? What's happening in high end? How is LVMH doing versus Walmart, et cetera? Because again, even though I said that there's a silver lining in the high income, consumers are seeing declines, middle income have come down but they're still increasing and low income are staying persistently high, around 8% year over year increases in their delinquency rates. And so we're probably next year going to see more households struggling to make ends meet than we saw this year. I still don't think that there is just looking at the trends going to be any kind of major break point. But the thing to bear in mind with that though is that, that if you look at here, this situation and you look at for instance, JP Morgan published that the amount of cash people have in their checking accounts is coming down. So it just means that there's more of a challenge if there's a big shock to the system at some point. Not that I can foresee any shock to the system, but it's always something to be a little bit wary of.

Joe Weisenthal (38:47)

Before we go on, I want to go back to something you said very quickly. You said, okay, intuitively, people with higher incomes that are going to have delinquencies at a lower rate than people with middle incomes and they're going to have delinquencies at a lower rate than people with lower incomes. That's not intuitive to me actually, because I would also imagine that underwriting is very different, et cetera. It's not obvious to me why higher income people default less than lower income people because I would imagine lenders know their income and they're going to scrutinize the loan of a lower income person much more intensely, et cetera. So, so why should this trend exist given that they don't get the same loan terms or same loan availability?

Ricard Bondabo (39:29)

No, they don't. And a high income household will buy typically more expensive than a car than a low income household will. But higher income households tend to have more of an ability to squirrel some money away or they tend to have other assets that they.

Joe Weisenthal (39:43)

But the lender knows that the lender knows that the higher income household is going to have likely more savings. And the lender knows shows that the household that's in a very tight income probably has very little cushion in the form of what we call wealth. And so why doesn't that just get baked into the underwriting standards?

Ricard Bondabo (40:03)

Well, in ways it does. Right. And so you know, when you're underwriting a loan for, let's say somebody who is high income and has a good credit history, your expectation of their default is going to be incredibly low. Right. So that's built into the pricing and that's built into. And you obviously don't just look at a credit score. You look at what their income is and various other important metrics to be able to determine the appropriate amount that you will lend them, et cetera. Right. But higher income consumers may not need to take on as much debt as a proportion to their income as lower income households to get through what they need to do. Right. And so if you look at for instance a high income household, how much of their. Even though, for instance, probably housing and car costs are some of the biggest outlays they have, proportionately they're probably less than for lower income households. Right. And so, you know, a lot of it has to do with that proportionality, but then also just that again, they will tend to have a bit more reserves so that they can ride through situations.

Joe Weisenthal (40:59)

Talk to us about auto delinquencies. Those have been rising and obviously there was a lot of lending going on. Again, Tracy mentioned the sort of 2020-2022 vintage car prices themselves are going up. So not only have the rates gone up, but we've seen a tremendous amount of, of auto inflation. So sort of stress at every level. We see the numbers going up. What do those tell us?

Ricard Bondabo (41:22)

It's a fascinating story. You know, there's been a lot of interest that was paid attention to auto loans because you know, suddenly in 2022 everybody started seeing these auto loan delinquencies going up much faster than other types of loan delinquencies. And it was having a profound effect obviously on auto lenders and, and, and the economy as a whole. And you know, everybody's trying to explain, well, you see, we got a bit too loose during the period of COVID and other things and they started adjusting their lending criteria. Right. So they did adjust their lending criteria around 2023 for most of them. But then we still saw that despite that, the delinquency rates kept persistently increasing. And then when we looked at the data, we actually saw that. But they had actually had an impact by adjusting their lending criteria. We saw that the delinquency rates on among subprime auto loans reduced quite dramatically after that. So they did have that effect. But we saw that the delinquency rates on near prime and prime continued to go up. And that was what drove that increase. And so we realized there's something more going on here. And also why is it it's so different? So we went back a long time, we went back to 2010 to try to understand kind of what's been going on because not many people look at it from that timescale, but it's actually quite Fascinating, because back in 2010, Auto had the best performance of any loan product at the time. It was the least risky.

Tracy Alloway (42:38)

This was always the narrative that Americans will never give up their cars. Even if they lose their job, they can sleep in their car and live in the car, which is very dystopian. But that's. I remember hearing that story literally from a banker, a banker who was actually working on bundling phone loans. And he was like, the other thing, right?

Joe Weisenthal (42:55)

No one will ever give up their phones.

Ricard Bondabo (42:57)

So at that time it performed well. Right. And people did not default as much on that as on other products. But then we've seen it has transitioned over that 15 year period to now. The first quarter this year it was the riskiest credit product out there. And then subsequently, student loans started coming in. And that's another story. Those delinquency rates are at historic levels. But on the auto loan side, we then try to understand what's causing this. Right? And so what we've seen was that there's a number of factors, some of them obvious, some of them a little bit more subtle. Right? The average cost of a car has gone up an incredible amount. And what we're seeing is then the average loan value for auto loans has increased more than any other loan value. And that may sound like, okay, but if you think about it, mortgages tend to be the one that grows the most because house prices have appreciated so much over time. So the fact that the average auto loan has grown more than the average mortgage has over that 15 year period is telling. Okay. Secondly, obviously there is this double whammy. So not only the in is the car more expensive, but then more recently, interest rates have been higher. Right? And so, you know, then I'm going to have to pay more, not just for the principal, but also the interest. But I think one of the things that has caught many consumers off guard is, okay, so they're in the dealership, they're being shown some numbers. Some people get it and they go like, okay, yes, we can still do that. We can make it work. We can just about mix and stretch. Because also I think people are trying to buy either the same that they had before or slightly better. I know many people like, like downgrading, okay? And so they think, well, it's the same car, and yes, it's a little bit more, but we can make ends meet, right, by looking at these numbers. But what they often forget about is that insurance has gone up significantly, as have just the cost of ownership. Repair costs have also gone up substantially. And so when all those things then hit them, they can be in a situation where we just can't make it work. And so that's not good. And the key piece of this too is, look, the good thing is of all the loan products, mortgages are performing pretty well. Okay, they are increasing, but they're still much, much lower than they were back in 2010, obviously much lower than 28, 29. So. But if you default on a mortgage, it takes some time before anything really happens, right? With an auto loan, they will come and they will take that car away from you. And given that, you know, so many people rely on that car to go to their job, to make their income, to do other tasks that are important, like they're shopping or taking their children to the school or other things that they need to do. People don't willingly just default on these auto loans. And so I think it is a sign that correlates with the fact that, you know, more households are struggling to make ends meet.

Tracy Alloway (45:34)

How much insight do you have into leverage? And the reason I ask is because we've seen an explosion in Buy Now Pay later programs. Virtually every site you go to now has three different options for getting a loan for a small amount. And only a few of those, my understanding is, are actually reporting to the credit bureaus. So. And I can also imagine if you're a lower income person who is perhaps more pressured, you're probably going to turn to a family member and say something like, hey, can you loan me, I don't know, 500 bucks to make it to the end of the month. And there's no way that credit scoring bureaus are going to have insight into things like that.

Ricard Bondabo (46:12)

Informal loans, the credit data that comes from the credit bureaus is still incredibly predictive and useful, but it doesn't capture everything. Look, Alex was on, I think recently a firm is starting to provision data to the credit file, which is great, but not all of them are there. And so, you know, I think there is still a lot that's not visible, and that is definitely a concern to lenders. We've been hearing their concerns about stacking and things of that nature. Obviously, these companies haven't got to where they are without having some understanding of risk themselves. Right. So they're not going to necessarily just let someone who's not performing a loan take out another five BNPL loans. Right. And the ability of a consumer to go to all different BNPL providers and use that, there's a level of effort and sophistication required to do that, that certainly I'm sure they're going to be some, but I don't know how many people fall into that category. Nevertheless, it is a concern that more is invisible. And that's why I think being able to pull in more than credit file data, such as cash flow data becomes really important. And so what we're seeing is that there are more and more that are looking to incorporate cash flow into the process because then they can have a better understanding of the ins and outs. Right. Is the their checking balance going up or declining over time? Is there? Does their income look like it's stable? Does it look like it's more sporadic? And so we have started building now credit scores that also incorporate that type of data. And that I think is going to become even more important as we go forward because there are going to be more and more ways that consumers can borrow. So that's probably the better way to get that holistic view.

Joe Weisenthal (47:39)

Just real quickly, auto delinquencies, are they at their highest level ever right now or close?

Ricard Bondabo (47:44)

Like what? Yep, I mean, they are, yes. And they're continuing to, to go up. So what we have seen though is that credit cards, for instance, they went up a lot. So they went up, yeah. Delinquencies, credit card delinquencies went up a lot in 2324, but they've started coming down and we started seeing personal loans coming down as well. So it's a very nuanced picture. So we've seen the unsecuritized delinquencies have started coming down this year, year over year. But we're still seeing mortgage and auto loans continue to increase, which is pretty.

Tracy Alloway (48:10)

Top seat turvy when you kind of think about it. But anyway, so the other thing happening now is ins rates going up because of the, I guess non extension of previous subsidies. And one thing you're seeing all over social media is people posting their new insurance rates for 2026. And I've seen some crazy ones, you know, something going from $600 to like $1,800 a month. How much pressure would you expect something like that to exert on the consumer for next year?

Ricard Bondabo (48:42)

You know, for many it's going to be the straw that could break the camel's back. Right. It's just particularly if it's like car insurance can be a very significant outlay for many households. But you know, there's other insurance for homeowners. Homeowner insurance is going up and particularly if they're in areas like California or Florida where, you know, Natural disasters have led to an increase in premiums above the national average. And so again, look, I don't see that there's any one thing that is going to, going to cause the house to fall down. But at the same time, just there's more and more households where that one unexpected increase puts them in a situation that makes it impossible for them to make their payments that month or for a number of months.

Joe Weisenthal (49:24)

Talk to us about the resumption of student loan payments after. I mean, you mentioned the importance of. There was not only the stimulus but all that sort of forbearance. And so all this stuff. Nice. The one thing that just kept getting pushed forever was the resumption of student loans. How much when those numbers turned back on or those payments turned back on, what kind of impact did that have? And what are we seeing with student loan delinquencies?

Ricard Bondabo (49:47)

Yeah, it had a very big impact. And so, you know, if we look back before COVID the average student loan delinquency rate was around that 10%. It was sort of wavering around between 9, 11% in that sort of range. And then obviously in this five year period of forbearances and no reporting because you had a period of a year through 24 where they were starting to need to make payments, but they just weren't being reported. So that's basically a long period of time where people just got used to not having to make that payment. And also a very substantial part of student loan borrowers who never had ever made a payment because they, you know, they finished their studies in a period when there was forbearance. And so, so what then happened was they started trickling back onto the credit file sort of mid February of this year. And then I think you got the first batch really kind of come in by May. And at that point you saw that the delinquency rates on the student loans that were not in deferment was over 20%. So they were over double what the historical norm was since then.

Joe Weisenthal (50:49)

Is that the highest level ever?

Ricard Bondabo (50:51)

It is the highest level that we've seen going back a long, long time. So remember, there's been a lot of changes when it was not federally mandated and privately owned. So I don't have visibility going back that, but at least in recent history, it's absolutely the highest by a very substantial amount. And that's not too surprising. But one of the things that we've seen is that we expected that there would be some people who go into delinquency not because they intended to Right. And so there were some people who they moved and they didn't get the addresses or a lot of people that were confused because there were so many mixed messages like we're going to be forgiven, but then we're not and we're on a certain program. But now that program doesn't exist anymore. So, so some people have been able to then address that. And so it's come down to this 17, 17.5%, which is a good sign. And so that's improving. But there still are people who are on programs that have been killed, like the SAVE program. And so they are going to next year have to either get onto another forbearance program or start making payments. And so maybe we haven't seen the full effect then basically of the resumption of student loans. We've seen the biggest batch come through, but there still are some more cohorts of consumer borrowers that will either have their existing program expire or that aren't being reported yet because the servicers are trying to figure out exactly what's going on before they report it to the credit bureau. So there still is a little bit of lack of visibility there from on the credit servicer side.

Joe Weisenthal (52:11)

Ricard, thank you so much for coming on Outlast. That was great.

Ricard Bondabo (52:14)

Thank you. It's been a pleasure.

Joe Weisenthal (52:29)

Tracy. It always comes back to insurance, doesn't it? That's always like the little fly in the ointment is, you know, you buy this car and it's like, okay, here's the car and here's the interest payment. Oh, I think we can make the math work, but you can't control what that insurance payment is going to be. You have no idea what it's going to be.

Tracy Alloway (52:44)

This is my theory. Insurers secretly run the world. They really do. You know, the other thing I was thinking, and we've written about this in the newsletter, but one of the difficulties of our current economic moment is there is so much division and difference built into the aggregate. If you're just looking at a single number, a total, like if you looked at the average FICO score of an American, it tells you almost nothing now because the individuals are still so desperate.

Joe Weisenthal (53:13)

Yeah. And it really does come down to, you know, wealth. Right. Wealth is just such an important factor in the economy. We always talk about income and income inequality and of course that's a real phenomenon. But wealth is such an important predictor driver of anything. And it also goes to show, like, how important, like financial markets and asset prices are to the real economy. And it gives me once again an opportunity to say the stock market is the economy because we live in such a wealth driven economy.

Tracy Alloway (53:43)

You know, someone once wrote into me, I wrote something about pressures on lower income people and someone wrote into me saying, well, why don't the lower income people own more assets? If they did, they'd be in a better position. Have you tried not being poor?

Joe Weisenthal (53:57)

Why haven't you tried just being rich? Why haven't you tried buying Nvidia 20 years ago? Why haven't you tried buying a house in California in 2009 after the bus? It's that simple. Stop being poor. Seriously.

Tracy Alloway (54:09)

The other thing I was thinking just on auto delinquencies. I also think the trade down story is a big piece here, which is, I mean a car from 10 years ago now is pretty decent. And I say that as someone who owns. I think it's a Toyota RAV from like 2011 or something like that.

Joe Weisenthal (54:26)

Oh yeah.

Tracy Alloway (54:27)

Like it's pretty dependable and I don't really feel the need to get like a fancy new car. And I imagine if you're under pressure on your car loan, it's probably like not that difficult necessarily to find an older car that is somewhat reliable. I don't know.

Joe Weisenthal (54:43)

You know the one thing though. So I have a car that I bought in 2015, it runs perfectly well. I would not be surprised if it continued. Like, no issues at all. It doesn't have CarPlay integration.

Ricard Bondabo (54:56)

Oh yeah.

Joe Weisenthal (54:57)

The one difference between older cars and newer cars is that it's very nice. Like having that. No, that, that interface where you have.

Tracy Alloway (55:05)

Like a nice, I got a little speaker or something.

Joe Weisenthal (55:07)

Yeah. But what it doesn't have is that like really nice interface. Interface with the map. Like and I know that's minor but it's like kind of.

Tracy Alloway (55:13)

Do you have a map?

Joe Weisenthal (55:15)

It's a Subaru for those curious. And it's like, hey, you know, it's like they're in house. It's a crappy map. It's not the really nice Google Maps where it's like really clear and it doesn't have turn by turn navigation. I know this sounds like kind of minor but it is very annoying. And like when I am in a car that has like a modern. Going off a little tangent here. But when I, when I am in a car that has like a really nice, nice interface with a nice Google Maps or Apple Maps and the Spotify integration, it's very nice and apparently we've taken it to the dealer. They just cannot. It is un Upgradeable. Yeah. It's unupgradable. There's no. For some reason, there is no way to put in a new dash.

Tracy Alloway (55:54)

Oh, sorry, I thought you meant unupgradable in terms of trading it in for.

Joe Weisenthal (55:59)

No, no, no. It's unupgradable. It's like, we cannot. Like this. We could never install CarPlay or whatever in this car.

Tracy Alloway (56:05)

My husband and I rented one of those, like, big, fancy trucks, pickup trucks. And I was amazed by the amenities that are actually in there, including, like, the heated seats. Personalized. Heated.

Joe Weisenthal (56:17)

I have a heated seat. Yeah.

Tracy Alloway (56:18)

That's fancy.

Joe Weisenthal (56:19)

No, it is very nice in the winter. Heated seats. Can we just talk about cars for a while longer?

Tracy Alloway (56:26)

But the thing is, like, even for a car like that, I just. I cannot imagine spending, like, $100,000 plus whatever the interest rate actually is on something like that.

Joe Weisenthal (56:36)

I remember that meme from, like, 2010. I was like, no one will ever default on. That was a big thing. And the phone.

Ricard Bondabo (56:43)

Right?

Tracy Alloway (56:43)

It really was. Yeah.

Joe Weisenthal (56:44)

Two things that people always find a way to make a payment for. The car and the phone. I forget.

Tracy Alloway (56:50)

Right. Which is why I think you have to look at something structural that's shifted, and I suspect maybe it's the availability of, you know, lots of older cars. But just.

Joe Weisenthal (57:00)

Just one last point. It's. I thought it was very interesting. Ricardo is saying it's like, there's no obvious catalyst for class cataclysm. There's not obvious. Like, oh, here is something. And we are on the verge of consumer credit collapse, but it is a story of just, like, steadily building pressure.

Tracy Alloway (57:18)

Right.

Joe Weisenthal (57:18)

Such that if there is some sort of spark or something, there is a lot of stress. Not, you know, the resumption of student loans after five years, the fact that the toll, total loan price of the car has gotten so high relative to people's income, all of these different things. So you, like, have all these upward stresses on prices. You have all of this reliance, obviously, on accumulated wealth, most notably stock market and home equity. So you have a lot of things come together that are not necessarily disaster or anything like that, but the alignment of pressures is there where things could potentially get bad.

Tracy Alloway (57:51)

Right. The consumer is much more fragile than they used to be, than they might.

Joe Weisenthal (57:55)

Have been a few years ago. Yeah.

Tracy Alloway (57:56)

All right. Shall we leave it there?

Joe Weisenthal (57:57)

Let's leave it there.

Tracy Alloway (57:58)

Okay. Another episode of the Odd Lots podcast. I'm Tracy Alloway. You can follow me at Tracy Alloway.

Joe Weisenthal (58:04)

And I'm Joe Weisenthal. You can follow me at the Stalwart. Follow our producers Carmen Rodriguez at CarmenArman, Dashiell Bennett at Dashbot, and Kell Brooks at Kalebrooks. For more Odd Lots content, go to bloomberg.comoddlots with the Daily newsletter and all of our episodes and you can chat about all of these topics 24. 7 in our Discord, Discord Ggodlots and.

Tracy Alloway (58:25)

If you enjoy Odd Lots, if you want me and Joe to just review cars in the future, then please leave us a positive review on your favorite podcast platform. And remember, if you are a Bloomberg subscriber, you can listen to all of our episodes absolutely ad free. All you need to do is find the Bloomberg Channel on Apple Podcasts and follow the instructions there. Thanks for listening.

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On, stay on and manage their meds.

Tracy Alloway (59:56)

And that helps you control your costs because healthier members are better for business. Go to CMK Co Access to learn more about helping your members stay adherent. That's CMK Co Acces Success Janice Torres.

Commercial Narrator (60:14)

Here and I'm Austin Hankwitz. We host the podcast Mind the Small Business Success Stories produced by Ruby Studio in partnership with Intuit QuickBooks.

Joe Weisenthal (60:22)

We're back for season four to talk.

Ricard Bondabo (60:24)

To some incredible small business owners.

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The big thing about working at tech is that it's ever evolving, ever changing. Everyone's a rookie.

Joe Weisenthal (60:30)

That's how fast the industry is changing.

Commercial Narrator (60:32)

So what I'm really excited about is.

Ricard Bondabo (60:33)

To be part of that change.

Commercial Narrator (60:35)

So listen on the iHeartRadio app, Apple Podcasts or wherever you get your podcast guests.

Joe Weisenthal (60:41)

This is Julian Edelman from Dudes on.

Ricard Bondabo (60:43)

Dudes with Gronk and Jewels.

Commercial Narrator (60:45)

Sunday mornings I've got my game day ritual, coffee, lucky socks and now new morning Uncrustable sandwiches. It's all about that 12 gram protein boost with the new Uncrustables Bright Eyed Berry or Up and apple flavors. Bright Eye Berries got a feisty receiver.

Ricard Bondabo (61:08)

Energy up an apple.

Commercial Narrator (61:10)

Your classic do it all tight end soft pillowy, packed with protein and easy enough for Gronk to grab from the freezer. Whether you're on the couch, driving to the tailgate or heading to the locker room, New Morning Uncrustable Sandwiches are the MVP of snacks. Your new Sunday kickoff ritual starts here year with New Morning Uncrustable sandwiches packed with 12 grams of protein.