Ep 3 - Are We Seeing Recovery in Consumer Performance With Dr. Joseph Breeden

Consumer Lending Perspectives

Host Jeff Bogan, CFO at Upgrade, talks with Dr. Joseph Breeden, a seasoned expert in credit risk management. They explore the post-pandemic lending landscape, discussing factors such as score inflation, macroeconomic adverse selection, and data imperfections affecting the lending industry.

“Consumers are not financially rational machines. And so it's very clear they key off changes in interest rates.” - Dr. Joseph Breeden

Dr. Breeden shares how credit risk models, economic conditions, and consumer psychology interplay to influence loan performance and lending strategies in today's economy.

IN THIS EPISODE:

• [00:45] Introduction to Dr. Joseph Breeden and his experience in risk management
• [01:07] Discussion on post-pandemic challenges and score inflation in consumer lending
• [03:27] Explanation of macroeconomic adverse selection and its impact on lending
• [06:35] Historical perspective on credit score dynamics across economic cycles
• [8:06] The importance of intuition and borrower psychology in lending
• [10:15] Tips on assessing loan demand and adjusting based on quality trends
• [14:10] Dr. Breeden discusses issues with the current unemployment rate data
• [17:35] Suggestions on what asset managers should monitor in the current economic environment
• [20:00] Discussion of Dr. Breeden's forthcoming book on credit risk modeling.
• [22:19] The Role of Data, Machine Learning, and Alternative Indicators
• [27:01] Dr. Breeden expresses optimism about the next 12 months for consumer assets

KEY TAKEAWAYS:

• Changes in consumer behavior during economic downturns, also known as macroeconomic adverse selection, can lead to lower- quality loan applicants despite high credit scores.
• While credit models are essential, lender intuition and borrower psychology play critical roles in predicting loan performance.
• As adverse selection begins to moderate, the next 12 months may present better opportunities for quality loan origination.

ABOUT THE GUEST:

Dr. Breeden has been designing and deploying risk management systems for loan portfolios since 1996. His expertise includes scoring, forecasting, stress testing, and economic capital models. Since 2011, Dr. Breeden has been CEO of Prescient Models, where he leads a consulting and product development team in this space, focusing on loan-level models for forecasting, stress testing, and pricing.

Previously, Dr. Breeden co-founded Strategic Analytics in 1999, where he led the design of advanced analytic solutions including the invention of Dual-time Dynamics. He has created models through the 1995 Mexican Peso Crisis, the 1997 Asian Economic Crisis, the 2001 Global Recession, the 2003 Hong Kong SARS Recession, and the 2007-2009 US Mortgage Crisis and Global Financial Crisis. These crises have provided him with a rare perspective on crisis management and the analytics needs of executives for strategic decision-making.

Dr. Breeden has published over 40 academic articles, a dozen trade publications, and six patents. His book “Reinventing Retail Lending Analytics: Forecasting, Stress Testing, Capital, and Scoring for a World of Crises” was published by Riskbooks in 2010 and is currently in its second edition.

Dr. Breeden received separate BS degrees in mathematics and physics in 1987 from Indiana University. He earned a Ph.D. in physics in 1991 from the University of Illinois studying real-world applications of chaos theory and genetic algorithms.

RESOURCE LINKS

Website: https://deepfutureanalytics.com/

LinkedIn: https://www.linkedin.com/in/josephlbreeden/

SLOOS Survey: https://www.federalreserve.gov/data/sloos.htm