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ZAIS Insights

Diverging household health

By Bernhard Eschweiler, PhD3 minute read

  • Financial health of lower-income households likely to deteriorate...
  • ...spelling risks for sub-prime consumer loans and mortgages
  • We see continued opportunities in careful credit selection

Household consumption was the main contributor to economic growth in 2022.1 This is remarkable, since the unwinding of fiscal support and surging inflation did not bode well for consumption. Yet real personal consumption rose 2.8% in 2022 despite a 6.4% drop in real disposable personal income.2

In our view, four factors help explain the discrepancy between household income and consumption: first, households dipped into the excess savings they accumulated during the first two years of the pandemic;3 second, households were still catching up on forgone spending during the pandemic, notably in services;4 third, overall household finances are in good shape;5 and fourth, there was no labor market stress.6

We believe the household sector will remain healthy in aggregate and is unlike to trigger stress as it did during the financial crisis. Yet we expect more divergence between income groups. In our view, lower-income households have largely exhausted their surplus savings, while their general finances are stretched. Furthermore, we think that lower-income households are exposed to prevailing inflation pressures and their income situation is more at risk if labor-market conditions deteriorate.

Given our expectation that lower-income households will come under heightened financial pressure, we think sub-prime consumer loans and mortgages will underperform. However, we do not expect a financial crisis and believe that credit pickers will find attractive opportunities, especially in prime credits with wider spreads.

Excess savings are falling

The Federal Reserve estimates that households accumulated excess savings of about $2.3 trillion or 10% of GDP in 2020 and through the middle of 2021.7 The Fed notes that the distribution and sources of excess savings vary significantly by income group. The bottom income quartile benefitted the most from government transfers but also used much of the funds to compensate for income losses, leaving small excess savings, while the top-income quartile reduced spending significantly and accumulated the most excess savings (see Chart 1).8

Excess household savings by income quartiles / 1000$ per household - Chart 1
Source: Board of Governors of the Federal Reserve System and ZAIS estimates 9

The build-up of excess savings started to reverse in the second half of 2021, as consumption picked up and government transfers faded.10 We reckon that total excess savings dropped by more than 50% from the peak in the third quarter of 2021 to the end of 2022. For the bottom income quartile, we estimate that excess savings dropped by 75% to $1,200 per household (see Chart 1 again). In our view, households in the bottom income quartile will exhaust all remaining excess savings during the first half of this year.

Stretched finances at the bottom

The government transfers during the pandemic were a welcome relief for lower-income households, which typically struggle to make ends meet and have little if any capacity to save (see Chart 2).11

A good measure that shows financial conditions for lower-income households remain stretched is the balance of cash and deposits minus consumer loans (see Chart 3). While the top half of households has been able to dramatically improve the balance into a surplus, the bottom half remains on a deteriorating trend.

Estimates of structural savings rates by income quintiles/ % of income  - Chart 2
Source: Karen E. Dynan, Jonathan Skinner, Stephen P. Zeldes12

Cash and checkable deposits minus consumer loans / 1000$ per household by wealth category - Chart 3
Source: Board of Governors of the Federal Reserve System13

From an individual perspective, many factors can push households into financial difficulties. From a macro perspective, worsening employment conditions and rising cost of living most often create financial difficulties for lower-income households.14

Marginal employment conditions matter for lower-income households

So far, the absence of labor market stress has been a key support for households across all income groups.15 We are not expecting a deep recession and a surge in unemployment. However, we believe employment conditions will deteriorate on the margin going forward creating problems for some lower-income households.

According to the U.S. Bureau of Labor Statistics, about two-thirds of all salary and wage workers are paid hourly.16 Thus, it is important not only to have a job, but to be able to work the necessary number of hours. Based on the Consumer Financial Protection Bureau’s “Making Ends Meet” survey, reduction in work hours is the most often cited reason for income losses.17

While overall unemployment remains low, hours worked and overtime hours have started to drop, especially in manufacturing (see Chart 4).18 There has also been a deterioration in the mix of full-time and part-time employment. Over the last 6 months, almost all employment gains came from part-time jobs, while full-time employment stagnated.19

Manufacturing hours worked / Index, 2015-19=100, 3mma - Chart 4
Source: U.S. Bureau of Labor Statistics20

We believe the decline in hours worked and the shift to more part-time jobs will continue in 2023 and also lead to declining wage growth and possibly moderate increases in unemployment as businesses adjust to tighter operating and financial conditions. The resulting income losses are likely to cause most difficulties for lower-income households.21

Cost-of-living pressures

Lower-income households are also more vulnerable to cost-of-living pressures. One area is housing. Fifty five percent of households at the bottom-quintile are renting as opposed to 35% for all households.22 Rents increased 8.3% over the last year and 14.5% since the start of the pandemic.23 In contrast, mortgage service expenditures for existing home owners have only increased marginally over the last year and are still more than 7% lower compared to the start of the pandemic (see Chart 5).

Rental versus mortgage expenses / Index, 2019=100 - Chart 5
Source: Board of Governors of the Federal Reserve System, US Bureau of Economic Analysis and U.S. Bureau of Labor Statistics24

Going forward, we forecast that mortgage servicing expenditures will gradually rise as old mortgages get refinanced and new mortgages come in at higher rates. Yet, we expect that rents will continue to rise faster than mortgage service expenditures due to growing rental demand – also because fewer people can afford to buy a home – and tight rental housing supply.

Utilities are another big ticket expense that lower-income households often have difficulties paying for.25 Residential electricity prices, especially, which are the largest utility expense for lower-income households, have surged 14.3% over the last year.26 The U.S. Energy Information Administration expects residential electricity prices will rise further in 2023 and exceed the pre-Corona level by nearly 20%.27

Food expenses also weigh heavily on the budget of lower-income households.28 Food prices rose 11.8% over the last year and the U.S. Department of Agriculture expects another rise of 8% in 2023, which is about four times faster than the long-term trend.29

Falling prices for gasoline and cars ¬– especially used cars – provide some relief, but the levels of gasoline and car prices are still far above pre-Corona levels.30 Falling car and gasoline prices are also less of a relief for lower-income households since they own fewer cars and so spend less on cars and their use.31

Summarizing, we expect cost-of-living pressures for lower-income households will decline less in 2023 than for all households. On the other hand, we forecast wage growth will ease, resulting at best in zero but more likely in ongoing negative real income growth for lower-income households.32

Rising credit risk for subprime loans

In aggregate, we observe no alarming stress in household credit and believe this will remain the case this year. Our main concern is that some subprime credits will experience difficulties and we believe this will become more visible in consumer loans as opposed to mortgages.

First, there are many more sub-prime borrowers in consumer loans than in mortgages.33 Borrowers with lower credit ratings are also more likely to come from lower-income households.34 Thus, our expectation that lower-income households will face more financial difficulties going forward suggests those stresses should impact consumer loans more than mortgages.

Second, debt service payments for consumer loans are higher than debt service payments for mortgages (see Chart 6). Going forward, we expect debt service payments for consumer loans will adjust faster to higher interest rates given the shorter maturity profile and the larger share of adjustable interest rates in consumer loans versus mortgages.35

Debt service payments / % of disposable income - Chart 6
Source: Board of Governors of the Federal Reserve System36

In our view, the pressure from rising debt-servicing payments will be felt the most by sub-prime consumer loan borrowers. For example, the effective interest rate for sub-prime credit card holders is roughly 5% points higher than for all card holders.37 Sub-prime credit card holders also pay significantly higher fees, notably for late payment.38

Banks tightening lending standards / % net balance - Chart 7
Source: Board of Governors of the Federal Reserve System39

The diverging credit outlook for consumer loans and mortgages is also reflected in the different degrees to which banks are tightening lending standards. Banks have tightened lending standards the most for credit cards and the least for mortgages (see Chart 7). Conversely, we expect tighter lending standards will make it more difficult for lower-income households, especially, to manage their finances and so will likely lead to more delinquencies.

Consumer loan delinquencies have already started to rise, albeit from low levels (see Chart 8). We expect this trend to continue in 2023 with delinquencies exceeding pre-pandemic levels. Credit card delinquencies with smaller banks, for example, have already reached the pre-Corona level.40 Morgan Stanley notes, in its latest ABS Dashboard, that sub-prime delinquency rates for auto loans reached 4.9% in December 2022, surpassing the level seen three years earlier and close to the highs of the last 15 years.41

Transition into delinquency / % of balance 30+ days overdue - Chart 8
Source: Federal Reserve Bank of New York42

Implications for asset backed securities

Just like last year, we expect this year to be a credit pickers’ market, which will reward careful credit analysis and prudent risk-taking. We also expect significant dispersion in performance across subsectors, borrower groups, vintages and originators.

While we see less risk for mortgage backed credits in aggregate, we note that some subprime mortgage pools are likely to underperform significantly. Having said that, we see attractive opportunities in residential CRT with seasoned collateral and with tranches higher in the capital structure which we believe are adequately insulated from downside risks in the economy in general, and housing in particular.

In the consumer space, we are generally cautious versus subprime credits across all sub-sectors. Furthermore, we believe unsecured consumer loans will underperform and lag all other consumer loans, given the discretionary nature of the underlying borrowing purposes. Having said that, we expect branch-based installment loan lenders to demonstrate greater stability of credit performance versus purely online lenders, given their experience through the credit cycles.

Given the range of possible outcomes, we see generally better risk-reward ratios in debt tranches versus equity tranches. As we are not expecting a credit crisis, investment-grade credits with higher yields and wider spreads look attractive to us. For example, we see interesting opportunities in prime and super-prime auto loans. We even expect high-grade installment loans to become attractive once the lagging fundamentals have played out and the rating agencies re-confirm their credit ratings.

More Information

As always, we are available to discuss our views with you. Please contact your Client Relations representative at +1 732 978 9722 or zais.clientrelations@zaisgroup.com

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Endnotes

  1. Real GDP rose 2.1% in 2022 and real personal consumption expenditure contributed 1.9% points.
    U.S. Bureau of Economic Analysis; Gross Domestic Product, Fourth Quarter 2022 and Year 2022 (Advance Estimate); Table 2. Contributions to Percent Change in Real Gross Domestic Product; January 26, 2023.
    https://www.bea.gov/sites/default/files/2023-01/gdp4q22_adv.pdf
  2. U.S. Bureau of Economic Analysis, Real Disposable Personal Income [A067RL1A156NBEA], retrieved from FRED, Federal Reserve Bank of St. Louis; January 26, 2023.
    https://fred.stlouisfed.org/series/A067RL1A156NBEA
    U.S. Bureau of Economic Analysis, Real Personal Consumption Expenditures [PCECCA], retrieved from FRED, Federal Reserve Bank of St. Louis; January 26, 2023.
    https://fred.stlouisfed.org/series/PCECCA
  3. U.S. Bureau of Economic Analysis, Personal Saving [PMSAVE], retrieved from FRED, Federal Reserve Bank of St. Louis; February 3, 2023.
    https://fred.stlouisfed.org/series/PMSAVE
  4. U.S. Bureau of Economic Analysis, Real Personal Consumption Expenditures: Services [PCESC96], retrieved from FRED, Federal Reserve Bank of St. Louis; January 24, 2023.
    https://fred.stlouisfed.org/series/PCESC96
    U.S. Bureau of Economic Analysis, Real personal consumption expenditures: Services: Food services and accommodations [DFSARX1Q020SBEA], retrieved from FRED, Federal Reserve Bank of St. Louis; January 25, 2023.
    https://fred.stlouisfed.org/series/DFSARX1Q020SBEA
  5. Households have high net worth, a high equity share in real estate and low debt service payments.
    Board of Governors of the Federal Reserve System (US), Households and Nonprofit Organizations; Net Worth as a Percentage of Disposable Personal Income, Level [HNONWPDPI], retrieved from FRED, Federal Reserve Bank of St. Louis; January 24, 2023.
    https://fred.stlouisfed.org/series/HNONWPDPI
    Board of Governors of the Federal Reserve System (US), Households; Owners' Equity in Real Estate as a Percentage of Household Real Estate, Level [HOEREPHRE], retrieved from FRED, Federal Reserve Bank of St. Louis; January 24, 2023.
    https://fred.stlouisfed.org/series/HOEREPHRE
    Board of Governors of the Federal Reserve System (US), Household Debt Service Payments as a Percent of Disposable Personal Income [TDSP], retrieved from FRED, Federal Reserve Bank of St. Louis; January 24, 2023.
    https://fred.stlouisfed.org/series/TDSP
  6. Employment rose 3% in 2022 and the unemployment rate fell to 3.5% by the end of the year, which is around the lows seen over the last 60 years.
    U.S. Bureau of Labor Statistics, All Employees, Total Nonfarm [PAYEMS], retrieved from FRED, Federal Reserve Bank of St. Louis; January 24, 2023.
    https://fred.stlouisfed.org/series/PAYEMS
    U.S. Bureau of Labor Statistics, Unemployment Rate [UNRATE], retrieved from FRED, Federal Reserve Bank of St. Louis; January 25, 2023.
    https://fred.stlouisfed.org/series/UNRATE
  7. Board of Governors of the Federal Reserve System (US); Excess Savings during the COVID-19 Pandemic; October 21, 2022.
    https://www.federalreserve.gov/econres/notes/feds-notes/excess-savings-during-the-covid-19-pandemic-20221021.html#fig5
  8. See also right panel of Figure 7; Board of Governors of the Federal Reserve System (US); Excess Savings during the COVID-19 Pandemic; October 21, 2022.
    https://www.federalreserve.gov/econres/notes/feds-notes/excess-savings-during-the-covid-19-pandemic-20221021.html#fig5
  9. The data is based on the left panel of Figure 7 (Board of Governors of the Federal Reserve System (US); Excess Savings during the COVID-19 Pandemic; October 21, 2022) and ZAIS’s estimation of the data for the fourth quarter of 2022 using the actual data of the personal savings rate through Q4-2022.
    https://www.federalreserve.gov/econres/notes/feds-notes/excess-savings-during-the-covid-19-pandemic-20221021.html#fig5
    U.S. Bureau of Economic Analysis, Personal saving as a percentage of disposable personal income [A072RC1Q156SBEA], retrieved from FRED, Federal Reserve Bank of St. Louis;
    https://fred.stlouisfed.org/series/A072RC1Q156SBEA, January 26, 2023.
  10. U.S. Bureau of Economic Analysis, Personal Saving Rate [PSAVERT], retrieved from FRED, Federal Reserve Bank of St. Louis; January 16, 2023.
    https://fred.stlouisfed.org/series/PSAVERT
  11. The Consumer Expenditure Surveys (CES) of the U.S. Bureau of Labor Statistics show that household income falls significantly short of expenditures for the two lowest income quintiles, implying deeply negative savings rates. In our view, the CES underestimates income and over estimates expenditures for the lower-income quintiles. However, the CES data shows clearly that savings rise with income. Academic research also shows that savings rise with income and that savings at the bottom of the income-distribution are low or even negative.
    U.S. Bureau of Labor Statistics; Consumer Expenditure Surveys (CES); Quintiles of income before taxes: Annual expenditure means, shares, standard errors, and coefficients of variation, CY 2021, MY 2019-2020.
    https://www.bls.gov/cex/tables/calendar-year/mean-item-share-average-standard-error/cu-income-quintiles-before-taxes-2021.pdf
    https://www.bls.gov/cex/tables/mid-year/mean-item-share-average-standard-error/cu-income-quintiles-before-taxes-2019-2020.pdf
    Karen E. Dynan, Jonathan Skinner, Stephen P. Zeldes; Do the Rich Save More? Journal of Political Economy, 2004, vol. 112, no. 2.
    http://piketty.pse.ens.fr/files/Dynanetal2004.pdf
    Emmanuel Saez and Gabriel Zucman; Wealth Inequality in the United States since 1913; THE QUARTERLY JOURNAL OF ECONOMICS; May 2016; Vol. 131, Issue 2.
    https://gabriel-zucman.eu/files/SaezZucman2016QJE.pdf
  12. Karen E. Dynan, Jonathan Skinner, Stephen P. Zeldes; Do the Rich Save More? Journal of Political Economy, 2004, vol. 112, no. 2; Table 3, Column 3.
    http://piketty.pse.ens.fr/files/Dynanetal2004.pdf
  13. Board of Governors of the Federal Reserve System (US), Checkable Deposits and Currency Held by the Bottom 50% (1st to 50th Wealth Percentiles) [WFRBLB50086], retrieved from FRED, Federal Reserve Bank of St. Louis; January 26, 2023.
    https://fred.stlouisfed.org/series/WFRBLB50086
    Board of Governors of the Federal Reserve System (US), Checkable Deposits and Currency Held by the 50th to 90th Wealth Percentiles [WFRBLN40059], retrieved from FRED, Federal Reserve Bank of St. Louis; January 26, 2023.
    https://fred.stlouisfed.org/series/WFRBLN40059
    Board of Governors of the Federal Reserve System (US), Checkable Deposits and Currency Held by the Top 1% (99th to 100th Wealth Percentiles) [WFRBLT01005], retrieved from FRED, Federal Reserve Bank of St. Louis; January 26, 2023.
    https://fred.stlouisfed.org/series/WFRBLT01005
    Board of Governors of the Federal Reserve System (US), Consumer Credit Held by the 50th to 90th Wealth Percentiles [WFRBLN40076], retrieved from FRED, Federal Reserve Bank of St. Louis; January 26, 2023.
    https://fred.stlouisfed.org/series/WFRBLN40076
    Board of Governors of the Federal Reserve System (US), Consumer Credit Held by the Bottom 50% (1st to 50th Wealth Percentiles) [WFRBLB50103], retrieved from FRED, Federal Reserve Bank of St. Louis; January 26, 2023.
    https://fred.stlouisfed.org/series/WFRBLB50103
    Board of Governors of the Federal Reserve System (US), Consumer Credit Held by the 50th to 90th Wealth Percentiles [WFRBLN40076], retrieved from FRED, Federal Reserve Bank of St. Louis; January 26, 2023.
    https://fred.stlouisfed.org/series/WFRBLN40076
    Board of Governors of the Federal Reserve System (US), Consumer Credit Held by the 90th to 99th Wealth Percentiles [WFRBLN09049], retrieved from FRED, Federal Reserve Bank of St. Louis; January 26, 2023.
    https://fred.stlouisfed.org/series/WFRBLN09049
    Board of Governors of the Federal Reserve System (US), Consumer Credit Held by the Top 1% (99th to 100th Wealth Percentiles) [WFRBLT01022], retrieved from FRED, Federal Reserve Bank of St. Louis; January 26, 2023.
    https://fred.stlouisfed.org/series/WFRBLT01022
    U.S. Census Bureau, Household Estimates [TTLHHM156N], retrieved from FRED, Federal Reserve Bank of St. Louis; January 17, 2023.
    https://fred.stlouisfed.org/series/TTLHHM156N
  14. Consumer Financial Protection Bureau (CFPB); Making Ends Meet in 2022: Insights from the CFPB Making Ends Meet survey, Tables 2 and 3; December 21, 2022.
    https://www.consumerfinance.gov/data-research/research-reports/insights-from-making-ends-meet-survey-2022/
  15. U.S. Bureau of Labor Statistics; Employment Situation Summary; February 3, 2023.
    https://www.bls.gov/news.release/empsit.nr0.htm
  16. U.S. Bureau of Labor Statistics; Current Population Survey - Earnings; Hourly-Paid Workers.
    https://www.bls.gov/cps/earnings.htm#minwage
  17. Consumer Financial Protection Bureau (CFPB); Making Ends Meet in 2022: Insights from the CFPB Making Ends Meet survey, Table 5; December 21, 2022.
    https://www.consumerfinance.gov/data-research/research-reports/insights-from-making-ends-meet-survey-2022/
  18. Overtime hours per week of production and non-supervisory employees in manufacturing has dropped to 3.8 hours in January 2022, which is almost 1 hour less than the trend before the pandemic.
    U.S. Bureau of Labor Statistics, Average Weekly Overtime Hours of Production and Nonsupervisory Employees, Manufacturing [AWOTMAN], retrieved from FRED, Federal Reserve Bank of St. Louis; February 3, 2023.
    https://fred.stlouisfed.org/series/AWOTMAN
  19. Typically, part-time employment accounts for less than 20% of total employment. Over the last 12 months to January 2023, the share of part-time employment in total employment gains was more than 50% and over the last 6 months almost all employment gains were in part time.
    U.S. Bureau of Labor Statistics, Employed, Usually Work Full Time [LNS12500000], retrieved from FRED, Federal Reserve Bank of St. Louis; February 3, 2023.
    https://fred.stlouisfed.org/series/LNS12500000
    U.S. Bureau of Labor Statistics, Employed, Usually Work Part Time [LNS12600000], retrieved from FRED, Federal Reserve Bank of St. Louis; February 2, 2023.
    https://fred.stlouisfed.org/series/LNS12600000
  20. U.S. Bureau of Labor Statistics, Average Weekly Hours of All Employees, Total Private [AWHAETP], retrieved from FRED, Federal Reserve Bank of St. Louis; January 26, 2023.
    https://fred.stlouisfed.org/series/AWHAETP
    U.S. Bureau of Labor Statistics, Average Weekly Overtime Hours of Production and Nonsupervisory Employees, Manufacturing [AWOTMAN], retrieved from FRED, Federal Reserve Bank of St. Louis; January 26, 2023.
    https://fred.stlouisfed.org/series/AWOTMAN
  21. According to the Consumer Financial Protection Bureau’s “Making Ends Meet” survey, more than half of lower-income as well as Black and Hispanic households could not cover their expenses for more than a month without main source of income.
    Consumer Financial Protection Bureau (CFPB); Making Ends Meet in 2022: Insights from the CFPB Making Ends Meet survey, Table 3; December 21, 2022.
    https://www.consumerfinance.gov/data-research/research-reports/insights-from-making-ends-meet-survey-2022/
  22. U.S. Bureau of Labor Statistics; Consumer Expenditure Surveys (CES); Quintiles of income before taxes: Annual expenditure means, shares, standard errors, and coefficients of variation, CY 2021.
    https://www.bls.gov/cex/tables/calendar-year/mean-item-share-average-standard-error/cu-income-quintiles-before-taxes-2021.pdf
  23. U.S. Bureau of Labor Statistics, Consumer Price Index for All Urban Consumers: Rent of Primary Residence in U.S. City Average [CUUR0000SEHA], retrieved from FRED, Federal Reserve Bank of St. Louis; January 28, 2023.
    https://fred.stlouisfed.org/series/CUUR0000SEHA
  24. Board of Governors of the Federal Reserve System (US), Mortgage Debt Service Payments as a Percent of Disposable Personal Income [MDSP], retrieved from FRED, Federal Reserve Bank of St. Louis; January 28, 2023.
    https://fred.stlouisfed.org/series/MDSP
    U.S. Bureau of Economic Analysis, Disposable Personal Income [DSPI], retrieved from FRED, Federal Reserve Bank of St. Louis; January 28, 2023.
    https://fred.stlouisfed.org/series/DSPI
    Board of Governors of the Federal Reserve System (US), All Sectors; Total Mortgages; Asset, Level [ASTMA], retrieved from FRED, Federal Reserve Bank of St. Louis; January 28, 2023.
    https://fred.stlouisfed.org/series/ASTMA
    U.S. Bureau of Labor Statistics, Consumer Price Index for All Urban Consumers: Rent of Primary Residence in U.S. City Average [CUUR0000SEHA], retrieved from FRED, Federal Reserve Bank of St. Louis; January 28, 2023.
    https://fred.stlouisfed.org/series/CUUR0000SEHA
  25. Utilities account for 9% of total expenses for the bottom quintile of households versus 6.3% for all households. U.S. Bureau of Labor Statistics; Consumer Expenditure Surveys (CES); Quintiles of income before taxes: Annual expenditure means, shares, standard errors, and coefficients of variation, CY 2021.
    https://www.bls.gov/cex/tables/calendar-year/mean-item-share-average-standard-error/cu-income-quintiles-before-taxes-2021.pdf
    Paying for utilities creates the most problems for lower-income households or makes it harder to pay for other expenses. Consumer Financial Protection Bureau (CFPB); Making Ends Meet in 2022: Insights from the CFPB Making Ends Meet survey, Figure 3; December 21, 2022.
    https://www.consumerfinance.gov/data-research/research-reports/insights-from-making-ends-meet-survey-2022/
  26. U.S. Bureau of Labor Statistics; Consumer Expenditure Surveys (CES); Quintiles of income before taxes: Annual expenditure means, shares, standard errors, and coefficients of variation, CY 2021.
    https://www.bls.gov/cex/tables/calendar-year/mean-item-share-average-standard-error/cu-income-quintiles-before-taxes-2021.pdf
    U.S. Bureau of Labor Statistics, Consumer Price Index for All Urban Consumers: Electricity in U.S. City Average [CUSR0000SEHF01], retrieved from FRED, Federal Reserve Bank of St. Louis; January 28, 2023.
    https://fred.stlouisfed.org/series/CUSR0000SEHF01
  27. U.S. Energy Information Administration; Short-Term Energy Outlook; January 10, 2023.
    https://www.eia.gov/outlooks/steo/report/electricity.php#:~:text=We%20forecast%20the%20U.S.%20residential,%2C%20up%208%25%20from%202021.
  28. Food at home accounts for 11.4% of total expenses for the bottom quintile of households versus 7.9% for all households. U.S. Bureau of Labor Statistics; Consumer Expenditure Surveys (CES); Quintiles of income before taxes: Annual expenditure means, shares, standard errors, and coefficients of variation, CY 2021.
    https://www.bls.gov/cex/tables/calendar-year/mean-item-share-average-standard-error/cu-income-quintiles-before-taxes-2021.pdf
  29. Food at home prices rose 11.8% in the 12 months to December 2022 versus a trend of 2% p.a. over the 20 years prior to the pandemic. U.S. Bureau of Labor Statistics, Consumer Price Index for All Urban Consumers: Food at Home in U.S. City Average [CUSR0000SAF11], retrieved from FRED, Federal Reserve Bank of St. Louis; January 27, 2023.
    https://fred.stlouisfed.org/series/CUSR0000SAF11
    U.S. Department of Agriculture; Food Price Outlook 2023; January 25, 2023.
    https://www.ers.usda.gov/data-products/food-price-outlook/summary-findings/#:~:text=In%202022%2C%20food%20prices%20increased,by%20more%20than%205%20percent.
  30. Gasoline prices dropped 27.5% since the peak in June 2022 to last December, but remain 24.5% above the pre-Corona level and used car prices dropped 8.8% in the 12 months to December 2022 yet are still 38% above the pre-Corona level.
    U.S. Bureau of Labor Statistics, Consumer Price Index for All Urban Consumers: Gasoline (All Types) in U.S. City Average [CUSR0000SETB01], retrieved from FRED, Federal Reserve Bank of St. Louis; , January 28, 2023.
    https://fred.stlouisfed.org/series/CUSR0000SETB01
    U.S. Bureau of Labor Statistics, Consumer Price Index for All Urban Consumers: Used Cars and Trucks in U.S. City Average [CUSR0000SETA02], retrieved from FRED, Federal Reserve Bank of St. Louis; January 28, 2023.
    https://fred.stlouisfed.org/series/CUSR0000SETA02
  31. 71% of households in the bottom quintile own a car versus 89% of all households. U.S. Bureau of Labor Statistics; Consumer Expenditure Surveys (CES); Quintiles of income before taxes: Annual expenditure means, shares, standard errors, and coefficients of variation, CY 2021.
    https://www.bls.gov/cex/tables/calendar-year/mean-item-share-average-standard-error/cu-income-quintiles-before-taxes-2021.pdf
  32. The annualized change of average hourly earnings declined from 6.2% in the fourth quarter of 2021 to 3.7% in January 2022. We expect that hourly wage growth will continue to fall in 2023 and result in further real income declines for lower-income households given their particular cost-of-living conditions.
    U.S. Bureau of Labor Statistics, Average Hourly Earnings of All Employees, Total Private [CES0500000003], retrieved from FRED, Federal Reserve Bank of St. Louis; February 3, 2023.
    https://fred.stlouisfed.org/series/CES0500000003
  33. Mortgage borrowers with FICO scores of less than 660 account for just about 5% of all mortgage borrowers, while auto loan borrowers with FICO scores of less than 660 account for about 30% of all auto loan borrowers.
    Federal Reserve Bank of New York; Quarterly Report on Household Debt and Credit; November 2022.
    https://www.newyorkfed.org/microeconomics/hhdc
    Subprime credit card lines account for roughly 15% of all credit card lines according to the American Bankers Association. According to Experian, however, credit card utilization rates are much higher for sub-prime borrowers (FICO scores of less than 670). Thus, we estimate that actual sub-prime credit card balances account for at least 30% of all credit card balances.
    American Bankers Association; Credit Card Market Monitor; December 2022.
    https://www.aba.com/-/media/documents/reports-and-surveys/2022-q2-credit-card-market-monitor.pdf?rev=b976da9db7e34af3a2771a0694aeeb01&hash=C5C4ADAFABED6989C4F4C13D1CC57A18
    Experian; Credit Card Debt in 2021; June 23, 2022.
    https://www.experian.com/blogs/ask-experian/state-of-credit-cards/
  34. Federal Reserve Bank of New York; Consumer Credit Panel / Equifax 2020Q2; retrieved from WalletHub; What is the Average Credit Score in America? May 4, 2022.
    https://wallethub.com/edu/cs/average-credit-scores/25578
  35. The average term (fixed rate) for new car loans is about 70 months and for used car loans 68 months. LendingTree; Average Car Payment and Auto Loan Statistics 2023; December 14, 2022.
    https://www.lendingtree.com/auto/debt-statistics/#Averageautoloanterms
    Interest rates on credit card balances are not fixed and can be adjusted by the credit card company with a notice period of 45 days. Consumer Financial Protection Bureau; When can my credit card company increase my interest rate? September 22, 2022.
    https://www.consumerfinance.gov/ask-cfpb/when-can-my-credit-card-company-increase-my-interest-rate-what-can-i-do-to-get-the-rate-back-down-en-69/
    90% of mortgages are fixed-rate terms of 10 years or more of which 70% are 30-year fixed rate mortgages. Roughly 10% of mortgages are adjustable rate mortgages. Consumer Financial Protection Bureau; HMDA Data 2021; Retrieved from Bankrate; U.S. mortgage statistics and FAQs; July 11, 2022.
    https://www.bankrate.com/mortgages/mortgage-statistics/
  36. Board of Governors of the Federal Reserve System (US), Household Debt Service Payments as a Percent of Disposable Personal Income [TDSP], retrieved from FRED, Federal Reserve Bank of St. Louis; January 29, 2023.
    https://fred.stlouisfed.org/series/TDSP
    Board of Governors of the Federal Reserve System (US), Mortgage Debt Service Payments as a Percent of Disposable Personal Income [MDSP], retrieved from FRED, Federal Reserve Bank of St. Louis; January 29, 2023.
    https://fred.stlouisfed.org/series/MDSP
  37. Consumer Financial Protection Bureau; The Consumer Credit Card Market; Section 3, Figures 5 and 6; September 2021.
    https://files.consumerfinance.gov/f/documents/cfpb_consumer-credit-card-market-report_2021.pdf
  38. Consumer Financial Protection Bureau; The Consumer Credit Card Market; Section 3, Figure 7; September 2021.
    https://files.consumerfinance.gov/f/documents/cfpb_consumer-credit-card-market-report_2021.pdf
  39. Board of Governors of the Federal Reserve System (US), Net Percentage of Domestic Banks Tightening Standards for Credit Card Loans [DRTSCLCC], retrieved from FRED, Federal Reserve Bank of St. Louis; February 3, 2023.
    https://fred.stlouisfed.org/series/DRTSCLCC
    Board of Governors of the Federal Reserve System (US), Net Percentage of Domestic Banks Tightening Standards for Auto Loans [STDSAUTO], retrieved from FRED, Federal Reserve Bank of St. Louis; February 3, 2023.
    https://fred.stlouisfed.org/series/STDSAUTO
    Board of Governors of the Federal Reserve System (US), Net Percentage of Domestic Banks Tightening Standards for Consumer Loans Excluding Credit Card and Auto Loans [STDSOTHCONS], retrieved from FRED, Federal Reserve Bank of St. Louis; February 3, 2023.
    https://fred.stlouisfed.org/series/STDSOTHCONS
    Board of Governors of the Federal Reserve System (US), Net Percentage of Domestic Banks Tightening Standards for GSE-Eligible Mortgage Loans [SUBLPDHMSENQ], retrieved from FRED, Federal Reserve Bank of St. Louis; February 3, 2023.
    https://fred.stlouisfed.org/series/SUBLPDHMSENQ
  40. Board of Governors of the Federal Reserve System (US), Delinquency Rate on Credit Card Loans, Banks Not Among the 100 Largest in Size by Assets [DRCCLOBS], retrieved from FRED, Federal Reserve Bank of St. Louis; January 28, 2023.
    https://fred.stlouisfed.org/series/DRCCLOBS
  41. Morgan Stanley Research; ABS Dashboard January 2023; Exhibits 34 and 35; January 10, 2023.
    https://www.morganstanley.com/what-we-do/research
  42. Federal Reserve Bank of New York; Quarterly Report on Household Debt and Credit; November 2022.
    https://www.newyorkfed.org/microeconomics/hhdc

Important Information



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Forward Looking Statements

This presentation may include statements and information that relate to subjective viewpoints as well as, among other things, potential future events, plans, projections, transactions, and assets, including related future assumptions. All such statements and information, other than of historical fact, included in this presentation are, as applicable, forward-looking, constitute only subjective views, expectations, beliefs, outlooks, predictions, estimations or intentions, should not be relied upon and are subject to change. Actual events or results may differ materially. These statements and information are based upon assumptions, beliefs and analyses made on the basis of subjective perception of historical trends, current conditions and expected future developments, as well as other factors that ZAIS believes are appropriate in the circumstances. Statements may constitute “forward-looking statements” within the meaning of the Securities Exchange Act of 1934. They may be prefaced by or subject to terms such as “anticipate” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “seek,” “approximately,” “may,” “plan,” “potential,” “should,” “would” and “will” or the negative thereof or other variations thereof or comparable terminology. These forward-looking statements include, among other things, projections, forecasts, estimates or hypothetical calculations with respect to income, yield or return, future performance targets, sample or pro forma portfolio structures or portfolio composition, scenario analysis, specific investment strategies or proposed or proforma levels of diversification or sector investment. These statements are necessarily based upon speculation, expectations, views, estimates and/or assumptions made by ZAIS with respect to past or future events and anticipated future operations and performance, are inherently unreliable and are subject to significant business, economic and competitive uncertainties, known and unknown risks and contingencies, many of which cannot be predicted or quantified and are beyond the control of ZAIS. Prospective investors are cautioned not to place undue reliance on such statements. No representation is made by ZAIS as to the accuracy, validity or relevance of any such forward-looking statement and the recipient agrees it is solely responsible for gathering its own information and undertaking its own projections, forecasts, estimates and hypothetical calculations. Future evidence and actual results could differ materially from those set forth in, contemplated by, or underlying these statements. All forward-looking statements included here are based on information available as of the date indicated and ZAIS does not assume any duty to update any forward-looking statement contained here. Some important factors which could cause actual results to differ materially from those in any forward-looking statements include, among others, the actual composition of the investment portfolio, any defaults in or to the investments, the timing of any defaults and subsequent recoveries, changes in interest rates, changes in currency rates and any weakening of the specific obligations included in the portfolio. Accordingly, there can be no assurance that estimated returns or projections can be realized, that forward-looking statements will materialize or that actual returns or results will not be materially lower or higher than those presented. The value of any investment, and the income from it, may fall as well as rise. Accordingly, there can be no assurances that an investor will receive back all or any of the original capital invested. Further, investments may be leveraged, and the portfolio of investments may lack diversification thereby increasing the risk of loss.

Opinions

Certain information contained herein represents ZAIS's current reasonable opinion and is based on unaudited and forecast figures which have been derived from multiple sources and have not been subject to specific due diligence. The information has been provided in good faith but is not guaranteed and is subject to uncertainties beyond ZAIS's control and should not be relied upon for the purposes of any investment decision. ZAIS makes no representations or warranties and accepts no liability whether in contract, tort or otherwise for (1) the information not being full and complete, (2) the accuracy of any opinion, (3) the basis on which any comparison has been drawn or the facts selected to make such comparison and (4) the assumptions underlying any opinions. ZAIS does not undertake to update its opinions. No opinion of this nature can be, and this information does not purport to be, full, complete, comprehensive or to contain all relevant information. Statements made herein that are not attributed to a third party source reflect the views and opinions of ZAIS.

ZAIS Group (UK) Limited

ZAIS Group (UK) Limited is a company registered in England with number 08908933 and whose registered office is at c/o Dixon Wilson, 22 Chancery Lane, London WC2A l LS, United Kingdom. ZAIS Group (UK) Limited is an appointed representative of Infinity Asset Management LLP, which is authorized and regulated by the Financial Conduct Authority in the United Kingdom. ZAIS Group UK Limited’s FCA status as an appointed representative of Infinity Asset Management LLP does not imply a certain level of skill or training. Investors will not benefit from the rules and regulations made under the Financial Services and Markets Act 2000 for the protection of investors, nor from the Financial Services Compensation Scheme in the United Kingdom. Nothing here excludes any liability which ZAIS is not permitted to exclude by applicable law.

Regulatory Registrations and Authorizations

ZAIS Group, LLC’s registrations with the Securities and Exchange Commission (the “SEC”) and the Commodity Futures Trading Commission (the “CFTC”), and ZAIS Group (UK) Limited’s status as an appointed representative of Infinity Asset Management LLP, which is regulated by the United Kingdom’s Financial Conduct Authority (“FCA”), does not imply a certain level of skill or training.

ESG/Responsible Investing

There can be no guarantee that responsible investing products or strategies will produce returns similar to or better than other strategies we manage. An environmental, social and governance (“ESG”) strategy restricts the types and number of available investments and prioritizes the ESG criteria over other investment criteria. Consequently, an ESG portfolio may perform differently from other strategies that do not screen for ESG factors. Responsible investing is qualitative and subjective by nature, and there can be no guarantee that the criteria we use, used or will use, or decisions we make, made or will make, will reflect any particular investor’s beliefs or values. We source some of the information we use in identifying responsible investments from voluntary or third-party reporting, which may not be accurate or complete. Responsible investing standards may vary by region. There can be no assurance that the responsible investing strategy and techniques we employed will be successful. Investors should be prepared to risk the loss of some or all of the capital invested in the ESG strategy.