October 1, 2025 • 22 mins
2025 has been all about the crunch. Credit is tight, uncertainty is everywhere and lenders are asking: is this the new normal or just another cycle? In this episode, we unpack what’s driving the squeeze, from regulation and rates to global risk, and how smart institutions are staying ahead.
We also look forward. 2026 will not be business as usual. AI, new lending models and shifting borrower behavior could reshape the landscape. Hear how leaders are finding opportunity in a market defined by uncertainty.
00:00 Anticipating a Fed Rate Cut
03:48 Embracing a New Financial Normal
08:48 Model Accuracy Relies on Recent Data
12:14 Advocating for Participation Loans
14:39 Credit Union Credit Builder Insights
19:16 Economic Uncertainty and Market Resilience
20:04 "Seizing High Yield Opportunities"
We also look forward. 2026 will not be business as usual. AI, new lending models and shifting borrower behavior could reshape the landscape. Hear how leaders are finding opportunity in a market defined by uncertainty.
00:00 Anticipating a Fed Rate Cut
03:48 Embracing a New Financial Normal
08:48 Model Accuracy Relies on Recent Data
12:14 Advocating for Participation Loans
14:39 Credit Union Credit Builder Insights
19:16 Economic Uncertainty and Market Resilience
20:04 "Seizing High Yield Opportunities"
Mark as Played
Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Speaker 1 (00:00):
I wish we had three percent thirty year mortgages again.
We may never see those again, Like this is a
new Normally, this type.
Speaker 2 (00:06):
Of environment could also last for an extended period. And
this is what it looks like for five eight years.
Speaker 1 (00:13):
I almost don't see that changing all that much in
twenty six, and then we're going to get into twenty seven,
and there's gonna be election in twenty eight and who knows,
right will.
Speaker 2 (00:20):
AI take jobs? It will take some, but it will
create others. How does that impact the economy?
Speaker 3 (00:28):
All right, welcome to another episode of leaders in Lending. Today,
we're going to talk about the twenty twenty five credit crunch.
As we all know, most institutions are tightening credit, probably
not for the best, but it's been something that's been
ongoing now for the remitt for the entire year. Barry
would love to get your perspective on kind of what's
what's driving the titan credit in twenty twenty five.
Speaker 1 (00:50):
Overall, I think just uncertainty. Right since we've had a
new administration come in in January, there were threats of
reductions in government workforce, which some have come to pass
and some haven't. The regulatory environment has sort of been
turned a little bit upside down. The CFPB doesn't seem
to have as much maybe forward influence as an expectation
(01:14):
than maybe what they had in the past. But then,
just in the economy, we've been waiting for a recession
hasn't come, been waiting for rates to reduce, hasn't come,
been waiting for unemployment to climb, hasn't necessarily I mean,
it's come up a little bit, but the labor market
is still really strong. So all the sort of fundamental
economic conditions that would normally predate a credit crunch haven't
(01:39):
necessarily come to pass. So it's been more about our
expectation or worry that's coming. And that's actually a prudent
approach in the face of uncertainty. May not necessarily be
the time to take on a whole lot of risk,
Although I'll argue with myself a little bit on this.
The counterpoint is, if everyone else is pulling back, isn't
that a really good time for you to pull forward
(02:01):
in a in an aggressive but in somewhat measured fashion.
When I say measured meaning more about the quality of risk.
You know, maybe that's something that that where some credit
unions and banks could win on.
Speaker 2 (02:15):
Sure, and I definitely think you know, geopolitical uncertainty as well.
I mean you touched on the regulatory and the economic uncertainty,
but you know, we continue to see turmoil in different
areas of the world, and you know, particularly in the
Middle East. And then you know tariffs on off do
we have tariff do we not? On what products?
Speaker 3 (02:33):
Uh?
Speaker 2 (02:33):
And those rollbacks and the impact of that just continues
to We've got uncertainty almost in every area of things
that normally would be kind of part of the fundamentals
of driving those decisions.
Speaker 1 (02:44):
Everyone's been waiting for a rate cut, right stock market up,
labor market's still pretty good. Inflation is running around three
percent right now. I know the Fed has won it
at two for a while, but we haven't been there
for a long time. Like, there's a lot of conditions
that traditionally wouldn't call for a rate cut. And I
think as as consumers, we all want to see a
(03:05):
rate cut. Even in our business, certainly a rate cut
would help to create maybe more in demand. And I
think as a as someone who manages the balance sheet,
if you're a CFO today, you're thinking about, Okay, can
I put more of the higher rate business on my
books now in the face of perhaps seeing the lower
(03:26):
rates going forward, you know, maybe that's that's suprett approach to.
Speaker 3 (03:29):
Take everything's not ebbing and flowing like it should, right,
So you think about there's many different reasons to tighten credit.
You talked about geopolitical, We're talking you know, there's delinquencies
that are rising. Do you think there's one honed in
area that is driving the crunch or is it just
a holistic view of all of them.
Speaker 2 (03:48):
Do you think about the you know, financial crisis in
LA the GFC. Everything felt unprecedented right after, and it
was this idea, you know, of the new normal, like
the world has changed, and I think we're there's a
lot of conversations like this where people are saying, how
are we going to get back to that? Like how
are we going to get to less uncertainty into more
(04:10):
stability and to being able to see those you know,
leading and trailing indicators and use them to make decisions.
And it could be that we don't. And it could
be that this is similar to how zero interest rates
we thought that was a short term thing and it
lasted for an extended period. This type of environment could
also last for an extended period, and maybe this is
(04:31):
what it looks like for five eight years, and there's
not going to be a sudden return to the same
fundamentals of what we thought were fundamentals before. There are
now new fundamentals.
Speaker 1 (04:43):
Right, this is a new normal basically, right. Yeah, there's
not been an event like COVID and the pandemic that
sort of caused that really brief recession we add in
twenty twenty. There's not been an event like the mortgage
backed securities and the housie market kind of floating back
in two thousand and eight. I laughed, because of the
(05:04):
conditions at the time, it was very apparent to while
you know, we were all in the business at that time,
and you know, certainly in California we could see if
as as a money mooning quarterback looking back at everything
that was happening around the housing markets, like, yeah, of
course this was unsustainable, right, But there's nothing like that
happening right now.
Speaker 2 (05:24):
There's no one thing to see.
Speaker 1 (05:26):
And so to your point, this is somewhat of the
new normal. You know, I hear from people saying, oh boy,
I wish we had three percent thirty year mortgages again.
We may never see those again, Like this is the
new normal. If you're paying six or seven percent for
thirty year mortgage, that's probably all as good as you're
going to get.
Speaker 2 (05:44):
It's not like early eighties numbers. I mean, we're not
you know, we could be paying fifteen percent seventeen.
Speaker 1 (05:48):
It's more like the nineties. You know, when I bought
my first house, I think, you know, at my rate
was somewhere around in the eighth and I was happy
with it and that was just just the way it was.
Speaker 3 (05:56):
So do you think the ongoing uncertainty though, Like you
think about talk to lending professionals on a daily basis,
and they've been telling us that inflation is going to arise,
We're tightening credit. They've been saying it now for almost
three years, and we haven't really got to that that
it factor similar to what the GFC was. Do you
think that that's going to be the new Norman because
there's so much tightening, it's just going to keep translating
(06:17):
as is. Or do you think if we see a
surge of untightened that things would pop or what are
your thoughts there?
Speaker 1 (06:23):
I mean, you just sort of introduced maybe a concept
of this arbitrary tightening across the industry, maybe that is
somewhat governing things today, that that's why we're not seeing
abundant losses. And I'll go back again to the PREGFC
with housing, where it was stated income applications and no
(06:43):
down payments and things like this, like all those sort
of risky conditions somewhat cavalier underwrite standards that went into
that that anyone can get a mortgage right And perhaps
now to your point, drew that by lenders tightening more
and more, that there's just less of a less of
(07:04):
a risk out there of this becoming something that would
be beyond the risk of what might other rest be expected.
Speaker 2 (07:13):
Well, there's such a reaction too, I mean, there was
such a I guess penalization, and I mean people could
people have different opinions of whether there was enough penalization
of the financial industry after or you know, and how
much the ownership the consumer versus the institutions had. But
like there was there were certainly a lot of repercussions
and consequences, and like DoD frank and and a lot
(07:35):
of other regulation Federal Reserve, Triprairie repro reform came out
of came out of the GFC, and so it is
possible that a lot of those things are actually working
well and better than maybe we think, because maybe we're
all kind of waiting for that other shoot to drop
and maybe it's.
Speaker 1 (07:51):
It's not Maybe there isn't another stree, it will.
Speaker 2 (07:53):
Not drop right, or maybe it'll drop in a different
way next time that hasn't happened before.
Speaker 1 (07:58):
So then maybe we put our foot on the gas again,
not all the way to the floor, right, but take
it a little bit less off the brake, a little
more on the gas than maybe that would be That
would be a.
Speaker 3 (08:08):
Good approach right now, Yeah, I know we've talked a
lot about this and prior podcast of leveraging the use
of AI models to predict risk more effectively. Right, so
you think about you wanted to take your foot off
the brake and press the gas a little bit again,
And going back to a prior podcast, we're giving more
of a description of how to have the knowledge base
to explain having these types of partnerships. But in actuality,
(08:29):
about seventy percent of financial institutions do use some form
of AI driven modeling for decisioning credit right, So how
do you think financial institutions are adapting those models to
have less risk or even to open things up and
be more predictive and bringing in the types of borrowers
that doesn't add the risk there.
Speaker 1 (08:48):
So models are only good as good as a data
that's that's in them. And so what sort of data
is being used to train those models? Is lending data
from the past, call it ten years, twelve years? Now,
what's been happening in the last ten to twelve years?
Who went from zero from ZERP into you know, a
little recession around COVID and you could almost sort of
(09:10):
throw out that little eighteen month period because it just
was unprecedented in terms of what happened with deposits and
then you know it's kind of dropping again. So these
models are trained on that data over that time period,
which if we are in a new normal, then wouldn't
that mean that the data that's in those models is
(09:32):
actually going to be maybe a better predictive value than
maybe data that was happening before the GFC for example.
Speaker 2 (09:40):
Sure that, yeah, like you need to need to actually
look at them more like have a little bit more
recency bias, like intentionally in how you're thinking about training
a model, because I think there's a lot of times,
you know, like COVID's a great example that people looked
back at that and said, oh, well that was an
unusual environment. Well maybe it was, but it also happened
in real life. So things that are unusual environments actually occurred.
(10:01):
So you can't skip it right in your model.
Speaker 1 (10:04):
Can't just toss that data.
Speaker 2 (10:05):
Yeah, Like you have to understand that there were you know,
there were liquidity injections from the federal government and deposit
increases and also with a zero interest rate. So it
was unusual, but it wasn't but it actually occurred, And
so like, how do you incorporate that in thinking about
what could happen next and how to plan for it.
Speaker 3 (10:26):
I think most often, too, like we've seen it over
the past few years, the resiliency of the American consumers
is there. They figure it out whether a piece of
paper tells us inflation has increased x percent, like, things
have stayed fairly stable, at least to my knowledge base,
to be able to be able to open up the
risk the risk door a little bit more so thinking
about you know, most institutions in some face that are
(10:49):
leveraging an AI driven model for predictive risk. Is there
a way that credit unions can expand their approval without
adding additional risk outside of leverage the use of models.
Speaker 2 (11:01):
So outside of using models, like, how else can they
kind of expand their approval? I mean, I certainly think
you know, a key theme automation and it doesn't have
to be predictive AI. Right, Like we talk a lot
about underwriting, which is more of a predictive AI, but
you know, thinking about using generative AI agent AI chat
agents to improve their customer member experience, improve the digital process.
(11:27):
I think a lot of those things can also drive
improval because they reduce friction in the flow, They increase
the chance of that new member being you know, satisfied
and getting the product that they need. And that's not
taking on any additional risk. It's actually reducing operational risk
while increasing the likelihood of approvals.
Speaker 3 (11:47):
All right, So going back to the whole theme of
different levers, So we talked about non model type of
approvals leveraging models, which seems to be the kind of
the new norm. Credit unions have their fingertips at a
bulk of different ways of leveraging risk through participations through
whole lowned purchases, through many different areas. So what are
the smartest levers you think current state that credit unions
(12:10):
can kind of pull to expand their access without adding
that risk.
Speaker 1 (12:14):
Yeah, I've I've always been an advocate for participation loans
as a way of changing risk on your balance sheet.
You know, you may be over index and certain asset
classes and under in others, so it's it's a smart
way to manage risk. It's also a smart way to
sort of manage any sort of pre payment risk you
may have duration of your portfolio, and also just to
(12:35):
to expand your balance sheet, you know, your it was
always sort of the dilemma between the CFO and and
and the lending professional ads to well, are we going
to put investments, We're going to put in participations, but
sort of looking at at the at the mathemats of it,
participations usually one out, depending on of course the ASCID
(12:56):
class you're looking at. But I've just always felt that
that's an underused lever in a lot of creditings. It's
easier to go out and buy treasuries. It's easier, you know,
your brokers are always sort of offering those sorts of things.
Not every broker is offering participation loan pools at the
same rate and level as they.
Speaker 2 (13:14):
Are other investments, and probably allows smaller institutions access to
a market that they may not be able to direct
originate it. Right that they may not be of the
size to set up a full partnership or whether a
director and direct origination of a product, but they can
access certain types areas of the credit market.
Speaker 1 (13:30):
With only commercial loans. For example, right, the small crediting
that I ran years ago, we didn't have a small
business platform, we didn't have the we didn't even have
commercial loan experience, but we could certainly go out and
participate in a loan or or a piece of an
apartment building or a piece of an office building in
the case may be, and you know not just give
(13:50):
bair diversity to the balance sheet and diverse find that
risk a little bit, but take a little bit of
a return.
Speaker 3 (13:55):
We could also use it like a geographic segmentation for
risk as well. I mean, just because certain stats come
out that the holistic view of the output inflation or
employment as X, y Z, it may be more or
less in different areas of the US.
Speaker 1 (14:09):
So you can there are still regional differences in this
country right, may.
Speaker 3 (14:13):
Can even dial down to the state county level as well.
Speaker 2 (14:16):
Sure well, I think particularly as you mentioned commercial real estate.
I mean that's a very different market depending on what
region you're in. Like Austin, for an example, is getting
getting hit hard, but an area like Columbus actually isn't
having the same impact. You know, return to office is
pretty entrenched, like companies are are, you know, back at work,
so the office office space is pretty full here compared
(14:37):
to certain markets.
Speaker 1 (14:37):
Definitely.
Speaker 2 (14:38):
Yeah.
Speaker 3 (14:39):
Another area that credit unions are very in depth with
our credit builders or shared secure types of loans. I
know that's not a large portion of the balance sheet,
but you think about from a d risk perspective, Let's
say a credit union was to pull back significantly in
their unsecured business to d risk and take on more
collateralized types of loans. How do you think I think
(15:00):
the credit builder system or the share secured system would
drive a risk reduction. Do you think the consumer just
doesn't understand that product. Is it not as appealing as
being able to get an unsecured personal loan or what
are your thoughts there on de risking and using that
as leverage, even though it's not as much of a
growth parameter.
Speaker 1 (15:21):
Yeah, and a fair point. I think access to credit
is so much more abundant now than it was maybe
a generation ago. Do I need to have a secured
do I need to put security down for a personal loan? Now?
There's just between FinTechs such as upstart and others out there,
and then the products that banks and credit unies have themselves.
(15:43):
There's just far more access for consumers to find affordable
credit for them now where they don't necessarily need to
tie up their own security on it.
Speaker 2 (15:52):
And I also think in new products that earned wage
access products where people get kind of a you know,
can tap their paid check in a more modern way,
a digital way. And then also as you think about
the you know, buy now, pay later, like point of
sale transactions, you can take those kind of things that
maybe somebody who would be using like a secured credit
(16:14):
card for can now take out that sort of product
and it's doing a more of a fixed installment loan
today and those products didn't exist.
Speaker 1 (16:21):
Ten fifteen, ten years ago.
Speaker 2 (16:24):
Yeah, that is that is a very common which is
an entirely different topic of you know, are those on
balance sheet? Do we see those on credit reports? I
think there's a lot of industry changes coming to how
those are reported. But but you know, you think about
you know, we've talked about CASHL underwriting and and CASHL
underwriting can help you see some of those things that
(16:44):
may not be present on a credit report. So as
you think about managing risk, do you are you actually
looking for those new products in a credit report versus
just looking at or in the information data you have
versus what is just on on kind.
Speaker 3 (16:59):
Of the balance That's a great point leveraging cash flow
modeling through a depository product. To see that you're making
four installment payments to Amazon for a one hundred dollars purchase,
like that's probably going to be baked into your risk
assessment from undwriting as well too.
Speaker 1 (17:13):
By now pay later on my brito right, four payments
of six dollars? Yeah sure, yeah exactly?
Speaker 3 (17:21):
Did this episode shift how you think about the credit
landscape in twenty twenty five? Subscribe to us on YouTube
for full video uploads and helpful bonus clips to share
with your team. So we talked a lot about the
credit crunch in twenty twenty five. I want to end
the end the podcast here with what are your thoughts
or bold predictions as it relates to what's coming in
twenty twenty six?
Speaker 2 (17:40):
Sure, so I think we talked a lot about like
the idea of this is this another yet another new normal?
And is it the world kind of fundamentally changing in
a new way. I do think a lot of the
uncertainty is driven by AI, and what will the impact
of AI be, whether that's predictive, AI, generative, AIG to AI.
(18:01):
I think most people don't even know the difference between
the types of AI today they have chat, GPT on
their phone or perplexity. But I suspect that that type
of just rapid industry change is going to have such
an impact that it's unknown. We can predict all we want,
but will AI take jobs? It will take some, but
(18:22):
it will create others. So how does that impact the economy.
I think the shift is going to look more something
like how the creation of the computer chip looked than
it will just another kind of economic cycle. So I
think it's you know, anybody's guest really of what that happens.
But I think that will be the primary driver of
(18:42):
continued uncertainty until we reset on some new set of fundamentals.
Speaker 1 (18:48):
Yeah, I mean, isn't AI really if you think about
the Internet age, right, which only came about thirty years
ago roughly right where you know, and then twenty years ago,
well fifteen years ago, we started to have it in
our pockets, right, isn't AI just taking that to a
different level altogether, which will again result in the brand
new new normal. Right, here's my bold prediction, and all
(19:10):
predictions are free or your money back. In twenty twenty six,
much the same. I mean, like I think there's again
we talked a little bit about tariffs and so on,
and the regulatory environment, and there's been so much uncertainty
with the direction of this administration. I almost don't see
that changing all that much in twenty six, And then
(19:30):
we're gonna get into twenty seven, and there's gonna be
election in twenty eight and who knows, right, But so
I think with all that uncertainty, there's gonna be a
lot of inertia. We're just gonna sort of stay where
we are. Maybe rates go down a little bit, maybe
they don't. But even if they do go down, I
don't see them going down all that much. It's still
sort of perplexing to me that despite all this uncertainty,
(19:52):
despite the inertia and so on, the stock market keeps
going up. Now, why is that? You know, earnings have
been pretty good so far twenty twenty five, and there's
really nothing on the horizon sort of a geopolitical event
or something, you know, another COVID pandemic sort of thing.
There's it doesn't feel like there's anything that's going to
(20:12):
be sort of changing that momentum all that much. So
if I'm sitting in a CFO chair or a CEO
chair or a lenders chair, you know, I am maybe
putting my foot on the gas a little bit more
now as rates are still a little bit higher, I
can maybe pull a little more yield. And if rates
do drop, then maybe that just helps me from a
(20:33):
boring costs down the road for that higher rate stuff
that I've I've kept my books knowing that there's a
pre payment risk with that. But nonetheless, you know that
old adage of you know, the farmer makes hey while
the sun shines, I mean the sun shining from a
high yield perspective, So why not take advantage of that
as much as you can right now? It's done a
smart way, right, you know, in a without taking on
(20:54):
a whole lot more credit risk. But you could maybe
look to other asset classes that you're not participating in now,
or other unique ways of looking at underwriting so that
you are sort of either increasing approval rates or or
improving the wide array of borders that you may have today.
Speaker 2 (21:13):
A little bit of a traditional asset allocation dollar cost
averaging you a little bit of everything, and go in
step wise over time.
Speaker 1 (21:22):
And I mean it's tried and true from an investment strategy.
Speaker 3 (21:25):
So put your foot on the gas, but stay in
the school section where you can't go above twenty miles
an hour.
Speaker 1 (21:31):
Test it out right, I mean you maybe, yeah, you've
covered your your your speed, but but yeah, I think
faster rather than slower.
Speaker 3 (21:41):
Well, thank you for listening to another episode of Leaders
in Lending. We'll see you next time.
I wish we had three percent thirty year mortgages again.
We may never see those again, Like this is a
new Normally, this type.
Speaker 2 (00:06):
Of environment could also last for an extended period. And
this is what it looks like for five eight years.
Speaker 1 (00:13):
I almost don't see that changing all that much in
twenty six, and then we're going to get into twenty seven,
and there's gonna be election in twenty eight and who knows,
right will.
Speaker 2 (00:20):
AI take jobs? It will take some, but it will
create others. How does that impact the economy?
Speaker 3 (00:28):
All right, welcome to another episode of leaders in Lending. Today,
we're going to talk about the twenty twenty five credit crunch.
As we all know, most institutions are tightening credit, probably
not for the best, but it's been something that's been
ongoing now for the remitt for the entire year. Barry
would love to get your perspective on kind of what's
what's driving the titan credit in twenty twenty five.
Speaker 1 (00:50):
Overall, I think just uncertainty. Right since we've had a
new administration come in in January, there were threats of
reductions in government workforce, which some have come to pass
and some haven't. The regulatory environment has sort of been
turned a little bit upside down. The CFPB doesn't seem
to have as much maybe forward influence as an expectation
(01:14):
than maybe what they had in the past. But then,
just in the economy, we've been waiting for a recession
hasn't come, been waiting for rates to reduce, hasn't come,
been waiting for unemployment to climb, hasn't necessarily I mean,
it's come up a little bit, but the labor market
is still really strong. So all the sort of fundamental
economic conditions that would normally predate a credit crunch haven't
(01:39):
necessarily come to pass. So it's been more about our
expectation or worry that's coming. And that's actually a prudent
approach in the face of uncertainty. May not necessarily be
the time to take on a whole lot of risk,
Although I'll argue with myself a little bit on this.
The counterpoint is, if everyone else is pulling back, isn't
that a really good time for you to pull forward
(02:01):
in a in an aggressive but in somewhat measured fashion.
When I say measured meaning more about the quality of risk.
You know, maybe that's something that that where some credit
unions and banks could win on.
Speaker 2 (02:15):
Sure, and I definitely think you know, geopolitical uncertainty as well.
I mean you touched on the regulatory and the economic uncertainty,
but you know, we continue to see turmoil in different
areas of the world, and you know, particularly in the
Middle East. And then you know tariffs on off do
we have tariff do we not? On what products?
Speaker 3 (02:33):
Uh?
Speaker 2 (02:33):
And those rollbacks and the impact of that just continues
to We've got uncertainty almost in every area of things
that normally would be kind of part of the fundamentals
of driving those decisions.
Speaker 1 (02:44):
Everyone's been waiting for a rate cut, right stock market up,
labor market's still pretty good. Inflation is running around three
percent right now. I know the Fed has won it
at two for a while, but we haven't been there
for a long time. Like, there's a lot of conditions
that traditionally wouldn't call for a rate cut. And I
think as as consumers, we all want to see a
(03:05):
rate cut. Even in our business, certainly a rate cut
would help to create maybe more in demand. And I
think as a as someone who manages the balance sheet,
if you're a CFO today, you're thinking about, Okay, can
I put more of the higher rate business on my
books now in the face of perhaps seeing the lower
(03:26):
rates going forward, you know, maybe that's that's suprett approach to.
Speaker 3 (03:29):
Take everything's not ebbing and flowing like it should, right,
So you think about there's many different reasons to tighten credit.
You talked about geopolitical, We're talking you know, there's delinquencies
that are rising. Do you think there's one honed in
area that is driving the crunch or is it just
a holistic view of all of them.
Speaker 2 (03:48):
Do you think about the you know, financial crisis in
LA the GFC. Everything felt unprecedented right after, and it
was this idea, you know, of the new normal, like
the world has changed, and I think we're there's a
lot of conversations like this where people are saying, how
are we going to get back to that? Like how
are we going to get to less uncertainty into more
(04:10):
stability and to being able to see those you know,
leading and trailing indicators and use them to make decisions.
And it could be that we don't. And it could
be that this is similar to how zero interest rates
we thought that was a short term thing and it
lasted for an extended period. This type of environment could
also last for an extended period, and maybe this is
(04:31):
what it looks like for five eight years, and there's
not going to be a sudden return to the same
fundamentals of what we thought were fundamentals before. There are
now new fundamentals.
Speaker 1 (04:43):
Right, this is a new normal basically, right. Yeah, there's
not been an event like COVID and the pandemic that
sort of caused that really brief recession we add in
twenty twenty. There's not been an event like the mortgage
backed securities and the housie market kind of floating back
in two thousand and eight. I laughed, because of the
(05:04):
conditions at the time, it was very apparent to while
you know, we were all in the business at that time,
and you know, certainly in California we could see if
as as a money mooning quarterback looking back at everything
that was happening around the housing markets, like, yeah, of
course this was unsustainable, right, But there's nothing like that
happening right now.
Speaker 2 (05:24):
There's no one thing to see.
Speaker 1 (05:26):
And so to your point, this is somewhat of the
new normal. You know, I hear from people saying, oh boy,
I wish we had three percent thirty year mortgages again.
We may never see those again, Like this is the
new normal. If you're paying six or seven percent for
thirty year mortgage, that's probably all as good as you're
going to get.
Speaker 2 (05:44):
It's not like early eighties numbers. I mean, we're not
you know, we could be paying fifteen percent seventeen.
Speaker 1 (05:48):
It's more like the nineties. You know, when I bought
my first house, I think, you know, at my rate
was somewhere around in the eighth and I was happy
with it and that was just just the way it was.
Speaker 3 (05:56):
So do you think the ongoing uncertainty though, Like you
think about talk to lending professionals on a daily basis,
and they've been telling us that inflation is going to arise,
We're tightening credit. They've been saying it now for almost
three years, and we haven't really got to that that
it factor similar to what the GFC was. Do you
think that that's going to be the new Norman because
there's so much tightening, it's just going to keep translating
(06:17):
as is. Or do you think if we see a
surge of untightened that things would pop or what are
your thoughts there?
Speaker 1 (06:23):
I mean, you just sort of introduced maybe a concept
of this arbitrary tightening across the industry, maybe that is
somewhat governing things today, that that's why we're not seeing
abundant losses. And I'll go back again to the PREGFC
with housing, where it was stated income applications and no
(06:43):
down payments and things like this, like all those sort
of risky conditions somewhat cavalier underwrite standards that went into
that that anyone can get a mortgage right And perhaps
now to your point, drew that by lenders tightening more
and more, that there's just less of a less of
(07:04):
a risk out there of this becoming something that would
be beyond the risk of what might other rest be expected.
Speaker 2 (07:13):
Well, there's such a reaction too, I mean, there was
such a I guess penalization, and I mean people could
people have different opinions of whether there was enough penalization
of the financial industry after or you know, and how
much the ownership the consumer versus the institutions had. But
like there was there were certainly a lot of repercussions
and consequences, and like DoD frank and and a lot
(07:35):
of other regulation Federal Reserve, Triprairie repro reform came out
of came out of the GFC, and so it is
possible that a lot of those things are actually working
well and better than maybe we think, because maybe we're
all kind of waiting for that other shoot to drop
and maybe it's.
Speaker 1 (07:51):
It's not Maybe there isn't another stree, it will.
Speaker 2 (07:53):
Not drop right, or maybe it'll drop in a different
way next time that hasn't happened before.
Speaker 1 (07:58):
So then maybe we put our foot on the gas again,
not all the way to the floor, right, but take
it a little bit less off the brake, a little
more on the gas than maybe that would be That
would be a.
Speaker 3 (08:08):
Good approach right now, Yeah, I know we've talked a
lot about this and prior podcast of leveraging the use
of AI models to predict risk more effectively. Right, so
you think about you wanted to take your foot off
the brake and press the gas a little bit again,
And going back to a prior podcast, we're giving more
of a description of how to have the knowledge base
to explain having these types of partnerships. But in actuality,
(08:29):
about seventy percent of financial institutions do use some form
of AI driven modeling for decisioning credit right, So how
do you think financial institutions are adapting those models to
have less risk or even to open things up and
be more predictive and bringing in the types of borrowers
that doesn't add the risk there.
Speaker 1 (08:48):
So models are only good as good as a data
that's that's in them. And so what sort of data
is being used to train those models? Is lending data
from the past, call it ten years, twelve years? Now,
what's been happening in the last ten to twelve years?
Who went from zero from ZERP into you know, a
little recession around COVID and you could almost sort of
(09:10):
throw out that little eighteen month period because it just
was unprecedented in terms of what happened with deposits and
then you know it's kind of dropping again. So these
models are trained on that data over that time period,
which if we are in a new normal, then wouldn't
that mean that the data that's in those models is
(09:32):
actually going to be maybe a better predictive value than
maybe data that was happening before the GFC for example.
Speaker 2 (09:40):
Sure that, yeah, like you need to need to actually
look at them more like have a little bit more
recency bias, like intentionally in how you're thinking about training
a model, because I think there's a lot of times,
you know, like COVID's a great example that people looked
back at that and said, oh, well that was an
unusual environment. Well maybe it was, but it also happened
in real life. So things that are unusual environments actually occurred.
(10:01):
So you can't skip it right in your model.
Speaker 1 (10:04):
Can't just toss that data.
Speaker 2 (10:05):
Yeah, Like you have to understand that there were you know,
there were liquidity injections from the federal government and deposit
increases and also with a zero interest rate. So it
was unusual, but it wasn't but it actually occurred, And
so like, how do you incorporate that in thinking about
what could happen next and how to plan for it.
Speaker 3 (10:26):
I think most often, too, like we've seen it over
the past few years, the resiliency of the American consumers
is there. They figure it out whether a piece of
paper tells us inflation has increased x percent, like, things
have stayed fairly stable, at least to my knowledge base,
to be able to be able to open up the
risk the risk door a little bit more so thinking
about you know, most institutions in some face that are
(10:49):
leveraging an AI driven model for predictive risk. Is there
a way that credit unions can expand their approval without
adding additional risk outside of leverage the use of models.
Speaker 2 (11:01):
So outside of using models, like, how else can they
kind of expand their approval? I mean, I certainly think
you know, a key theme automation and it doesn't have
to be predictive AI. Right, Like we talk a lot
about underwriting, which is more of a predictive AI, but
you know, thinking about using generative AI agent AI chat
agents to improve their customer member experience, improve the digital process.
(11:27):
I think a lot of those things can also drive
improval because they reduce friction in the flow, They increase
the chance of that new member being you know, satisfied
and getting the product that they need. And that's not
taking on any additional risk. It's actually reducing operational risk
while increasing the likelihood of approvals.
Speaker 3 (11:47):
All right, So going back to the whole theme of
different levers, So we talked about non model type of
approvals leveraging models, which seems to be the kind of
the new norm. Credit unions have their fingertips at a
bulk of different ways of leveraging risk through participations through
whole lowned purchases, through many different areas. So what are
the smartest levers you think current state that credit unions
(12:10):
can kind of pull to expand their access without adding
that risk.
Speaker 1 (12:14):
Yeah, I've I've always been an advocate for participation loans
as a way of changing risk on your balance sheet.
You know, you may be over index and certain asset
classes and under in others, so it's it's a smart
way to manage risk. It's also a smart way to
sort of manage any sort of pre payment risk you
may have duration of your portfolio, and also just to
(12:35):
to expand your balance sheet, you know, your it was
always sort of the dilemma between the CFO and and
and the lending professional ads to well, are we going
to put investments, We're going to put in participations, but
sort of looking at at the at the mathemats of it,
participations usually one out, depending on of course the ASCID
(12:56):
class you're looking at. But I've just always felt that
that's an underused lever in a lot of creditings. It's
easier to go out and buy treasuries. It's easier, you know,
your brokers are always sort of offering those sorts of things.
Not every broker is offering participation loan pools at the
same rate and level as they.
Speaker 2 (13:14):
Are other investments, and probably allows smaller institutions access to
a market that they may not be able to direct
originate it. Right that they may not be of the
size to set up a full partnership or whether a
director and direct origination of a product, but they can
access certain types areas of the credit market.
Speaker 1 (13:30):
With only commercial loans. For example, right, the small crediting
that I ran years ago, we didn't have a small
business platform, we didn't have the we didn't even have
commercial loan experience, but we could certainly go out and
participate in a loan or or a piece of an
apartment building or a piece of an office building in
the case may be, and you know not just give
(13:50):
bair diversity to the balance sheet and diverse find that
risk a little bit, but take a little bit of
a return.
Speaker 3 (13:55):
We could also use it like a geographic segmentation for
risk as well. I mean, just because certain stats come
out that the holistic view of the output inflation or
employment as X, y Z, it may be more or
less in different areas of the US.
Speaker 1 (14:09):
So you can there are still regional differences in this
country right, may.
Speaker 3 (14:13):
Can even dial down to the state county level as well.
Speaker 2 (14:16):
Sure well, I think particularly as you mentioned commercial real estate.
I mean that's a very different market depending on what
region you're in. Like Austin, for an example, is getting
getting hit hard, but an area like Columbus actually isn't
having the same impact. You know, return to office is
pretty entrenched, like companies are are, you know, back at work,
so the office office space is pretty full here compared
(14:37):
to certain markets.
Speaker 1 (14:37):
Definitely.
Speaker 2 (14:38):
Yeah.
Speaker 3 (14:39):
Another area that credit unions are very in depth with
our credit builders or shared secure types of loans. I
know that's not a large portion of the balance sheet,
but you think about from a d risk perspective, Let's
say a credit union was to pull back significantly in
their unsecured business to d risk and take on more
collateralized types of loans. How do you think I think
(15:00):
the credit builder system or the share secured system would
drive a risk reduction. Do you think the consumer just
doesn't understand that product. Is it not as appealing as
being able to get an unsecured personal loan or what
are your thoughts there on de risking and using that
as leverage, even though it's not as much of a
growth parameter.
Speaker 1 (15:21):
Yeah, and a fair point. I think access to credit
is so much more abundant now than it was maybe
a generation ago. Do I need to have a secured
do I need to put security down for a personal loan? Now?
There's just between FinTechs such as upstart and others out there,
and then the products that banks and credit unies have themselves.
(15:43):
There's just far more access for consumers to find affordable
credit for them now where they don't necessarily need to
tie up their own security on it.
Speaker 2 (15:52):
And I also think in new products that earned wage
access products where people get kind of a you know,
can tap their paid check in a more modern way,
a digital way. And then also as you think about
the you know, buy now, pay later, like point of
sale transactions, you can take those kind of things that
maybe somebody who would be using like a secured credit
(16:14):
card for can now take out that sort of product
and it's doing a more of a fixed installment loan
today and those products didn't exist.
Speaker 1 (16:21):
Ten fifteen, ten years ago.
Speaker 2 (16:24):
Yeah, that is that is a very common which is
an entirely different topic of you know, are those on
balance sheet? Do we see those on credit reports? I
think there's a lot of industry changes coming to how
those are reported. But but you know, you think about
you know, we've talked about CASHL underwriting and and CASHL
underwriting can help you see some of those things that
(16:44):
may not be present on a credit report. So as
you think about managing risk, do you are you actually
looking for those new products in a credit report versus
just looking at or in the information data you have
versus what is just on on kind.
Speaker 3 (16:59):
Of the balance That's a great point leveraging cash flow
modeling through a depository product. To see that you're making
four installment payments to Amazon for a one hundred dollars purchase,
like that's probably going to be baked into your risk
assessment from undwriting as well too.
Speaker 1 (17:13):
By now pay later on my brito right, four payments
of six dollars? Yeah sure, yeah exactly?
Speaker 3 (17:21):
Did this episode shift how you think about the credit
landscape in twenty twenty five? Subscribe to us on YouTube
for full video uploads and helpful bonus clips to share
with your team. So we talked a lot about the
credit crunch in twenty twenty five. I want to end
the end the podcast here with what are your thoughts
or bold predictions as it relates to what's coming in
twenty twenty six?
Speaker 2 (17:40):
Sure, so I think we talked a lot about like
the idea of this is this another yet another new normal?
And is it the world kind of fundamentally changing in
a new way. I do think a lot of the
uncertainty is driven by AI, and what will the impact
of AI be, whether that's predictive, AI, generative, AIG to AI.
(18:01):
I think most people don't even know the difference between
the types of AI today they have chat, GPT on
their phone or perplexity. But I suspect that that type
of just rapid industry change is going to have such
an impact that it's unknown. We can predict all we want,
but will AI take jobs? It will take some, but
(18:22):
it will create others. So how does that impact the economy.
I think the shift is going to look more something
like how the creation of the computer chip looked than
it will just another kind of economic cycle. So I
think it's you know, anybody's guest really of what that happens.
But I think that will be the primary driver of
(18:42):
continued uncertainty until we reset on some new set of fundamentals.
Speaker 1 (18:48):
Yeah, I mean, isn't AI really if you think about
the Internet age, right, which only came about thirty years
ago roughly right where you know, and then twenty years ago,
well fifteen years ago, we started to have it in
our pockets, right, isn't AI just taking that to a
different level altogether, which will again result in the brand
new new normal. Right, here's my bold prediction, and all
(19:10):
predictions are free or your money back. In twenty twenty six,
much the same. I mean, like I think there's again
we talked a little bit about tariffs and so on,
and the regulatory environment, and there's been so much uncertainty
with the direction of this administration. I almost don't see
that changing all that much in twenty six, And then
(19:30):
we're gonna get into twenty seven, and there's gonna be
election in twenty eight and who knows, right, But so
I think with all that uncertainty, there's gonna be a
lot of inertia. We're just gonna sort of stay where
we are. Maybe rates go down a little bit, maybe
they don't. But even if they do go down, I
don't see them going down all that much. It's still
sort of perplexing to me that despite all this uncertainty,
(19:52):
despite the inertia and so on, the stock market keeps
going up. Now, why is that? You know, earnings have
been pretty good so far twenty twenty five, and there's
really nothing on the horizon sort of a geopolitical event
or something, you know, another COVID pandemic sort of thing.
There's it doesn't feel like there's anything that's going to
(20:12):
be sort of changing that momentum all that much. So
if I'm sitting in a CFO chair or a CEO
chair or a lenders chair, you know, I am maybe
putting my foot on the gas a little bit more
now as rates are still a little bit higher, I
can maybe pull a little more yield. And if rates
do drop, then maybe that just helps me from a
(20:33):
boring costs down the road for that higher rate stuff
that I've I've kept my books knowing that there's a
pre payment risk with that. But nonetheless, you know that
old adage of you know, the farmer makes hey while
the sun shines, I mean the sun shining from a
high yield perspective, So why not take advantage of that
as much as you can right now? It's done a
smart way, right, you know, in a without taking on
(20:54):
a whole lot more credit risk. But you could maybe
look to other asset classes that you're not participating in now,
or other unique ways of looking at underwriting so that
you are sort of either increasing approval rates or or
improving the wide array of borders that you may have today.
Speaker 2 (21:13):
A little bit of a traditional asset allocation dollar cost
averaging you a little bit of everything, and go in
step wise over time.
Speaker 1 (21:22):
And I mean it's tried and true from an investment strategy.
Speaker 3 (21:25):
So put your foot on the gas, but stay in
the school section where you can't go above twenty miles
an hour.
Speaker 1 (21:31):
Test it out right, I mean you maybe, yeah, you've
covered your your your speed, but but yeah, I think
faster rather than slower.
Speaker 3 (21:41):
Well, thank you for listening to another episode of Leaders
in Lending. We'll see you next time.
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