Retail Sales Have Tailwinds Heading into 2022 Despite Soft End to 2021
Consumers step back in December. Core retail sales dipped 2.5 percent last month as spending that usually occurs closer to the holidays was spread over a longer shopping season. Furthermore, the highly contagious omicron variant of COVID-19 elevated case counts, keeping more people at home. Retail sales, however, are up 16.5 percent from one year ago and consumers still have more than $5 trillion additional funds in savings and money market accounts.
Accurate loan valuation and pricing is critical for many reasons:
1. It sets expectations appropriately between buyers and sellers and allows for objective evaluation of whole loan bids
2. It properly sets PCI marks, reserves against impaired loans and allows for a release of reserves when the opportunity presents itself.
3. It is critical for mergers and acquisitions and loan portfolio investment decisions.
4. …and It ensures accurate movement of loans into a held for sale status
Model complexity, however, doesn’t enhance reliability. Pricing accuracy increases for three basic reasons:
1. The volume and frequency of loans and portfolios priced, including large data set evaluations for entities like the FDIC, FHLBs and HUD
2. Using Transaction Tracker intelligence to triangulate recent actual note sale results against financial reporting and publicly available data in an opaque marketplace
3. Marking to market collateral values in real time
Accurate qualitative data from comparable loan sale, investment sale, and financing transactions properly validates quantitative financial models. This guards against confirmation bias that occurs when flexing sensitive model assumptions that can exaggerate model outcomes.
What does this mean for loan portfolios? In 2022, regulators expect CARES Act 4013 designated loans to either return to the line or be properly risk rated as a TDR. Understanding true loan value for these assets in an opaque, fast paced and volatile marketplace can mean the difference between booking gains or incurring losses on difficult to price assets. PCI loans marked before or during COVID very often have embedded gains that should be monetized at high water mark pricing. As the Fed finally begins its tapering, selling risk into frothy markets at or above intrinsic value will be a winning strategy for 2022.