Banks' New Dilemma: They Cannot Tell Who is a Good Risk

Mish

Are people paying their bills on time? Thanks to Covid regulations, there is no way to tell.

Banks Are Flying Blind

Businesses are not allowed to report to the credit agencies who is in mortgage, credit card, or auto loan forbearance plans. 

So how do banks decide who is a good credit risk when they are Flying Blind?

“Without accurate information, their only option is to pull back on credit,” said Michael Abbott, head of banking for North America at consulting firm Accenture PLC. “Banks don’t know who is going to pay and who isn’t. It’s like flying blind into a credit storm.”

Banks started tightening their underwriting standards in March, when the first wave of coronavirus layoffs began. 

By early April, 33% of banks that responded to the Federal Reserve’s senior loan officer survey said they had increased their minimum credit-score requirements for credit cards over the previous three months, up from 14% in January. Bank respondents tightened lending standards for all consumer-loan categories tracked by the survey.

Loan originations have fallen, a result both of the tightening and a decline in consumer demand. An estimated 79,000 personal loans were extended in the week ended May 10, compared with 226,000 in the week ended March 22, according to Equifax Inc. Auto loan and lease originations fell to 266,000 from 390,000 during the same period. General-purpose credit-card originations totaled 483,000, down from 856,000. In 2019, weekly card originations rarely fell below 1.2 million.

Some lenders pay for phone data to see who is calling the unemployment office. Other lenders are using natural disaster codes instead of late payment codes. 

TransUnion is providing data to lenders to help them determine whether consumers have been affected by the pandemic. This data can be used by lenders and insurers to help them better support impacted consumers. The data cannot be used to deny a person credit. 

Fair Isaac is rolling out a new index to inform lenders how likely the applicant is to withstand financial difficulties during the downturn.

Lending Standards Tightest in Six Years

Mortgage Applications

At Least 20 Million Out of Work

Continued Unemployment Claims in 2020 June 25

Impossible to Sugarcoat the Disastrous Unemployment Claims

There are close to 20 million unemployment claims a the state level. That does not count perhaps as many as another 10 million in federal payment protection programs. 

For discussion, please see Impossible to Sugarcoat the Disastrous Unemployment Claims. 

Mortgage Forbearance On the Rise

Mortgage forbearance plans topped the $1 trillion mark in unpaid principal last week. 

These loans are not reported to credit agencies as delinquencies.

For details, please see Mortgage Forbearances Rise for the First Time in 3 Weeks

Since banks have no idea who is paying the bills, they have curtailed credit.

Meanwhile, reopenings are in reverse in several place including Arizona, Texas, and Florida. 

Reopenings in Reverse

The only solution is more free money.

Got Gold?

In case you missed it, please see More Gold Hype: No Escape for Shorts

Mish

Comments (39)
No. 1-17
Sechel
Sechel

gosh , but up to now the banks have done great judging credit risks

no commercial loan problems
no brics problem
no student loan problem
no subprime mortgage problem
no cdo problem
no cds problem

I'm hard pressed to find a situation where the banks were prudent underwriters of risk

Herkie
Herkie

Funny, I bought a house and my credit score dropped 28 points. I always thought being a homeowner improved your credit score, but here is the thing that bugs me, FICO is launching a new way to score people, all the same old metrics remain in place but they are adding a score from 1 to 99 with the lower your score the more resilient you are to economic downturns.

FICO rolls out new credit scoring model, but experts suggest it might not impact you yet
CNBC Select speaks to credit experts about FICO’s Resilience Index and how it can affect borrowers looking for new credit.
Updated Mon, Jun 29 2020

And why does this make me mad? Because my income might not be as high as yours is, and I may not have as much saved as you do, but, I can NEVER under any circumstances lose my income or have it reduced short of death or the dissolution of the United States. My income comes from the US Department of Veteran Affairs trust fund for disabled vets, and a smaller amount from the SS Trust Fund. I should score a 1 on this new scale, unless FICO has decided the government is no longer stable, or, they expect inflation to swamp fixed incomes to the point where they expect the public to prioritize consumption over bill paying out of necessity.

It is just another layer of income inequality masquerading as due diligence.

tokidoki
tokidoki

And yet no one's demoing against the Fed.

Zardoz
Zardoz

Does it matter? The banks are already chock full loans that were probably destined to turn bad even before the unemployment hit. The fed will bail them out, as ever... Billions, Trillions, Squillions, it's just a number. Damn the torpedos! FULL SPEED AHEAD!

thimk
thimk

demand destruction ?

Bam_Man
Bam_Man

Needless to say, there are relatively few credit-worthy borrowers out there.
We are at the very end of a 100-year credit super-cycle. It will involve a painful adjustment to a much lower standard of living for most people. And that's if we manage to avoid a hyper-inflation - which is far from certain at this point.

JustDaFactsJack
JustDaFactsJack

Seems an easy problem to fix. Just go back to Collateral, Capacity, Character.

Should be easy to assess collateral. Capacity can be confirmed with a call to the reported employer, verifying reported income and job status. And character can be assessed by long term history.

Casual_Observer
Casual_Observer

Banks have access to everyone's financial information. It is easy to tell who is paying on time and who isn't. They don't need the credit agencies to do this. They can simply ask another bank.

Tony Bennett
Tony Bennett

"Since banks have no idea who is paying the bills, they have curtailed credit."

...

Yes ... the downhill snowball just getting started.

With stimulus / forbearance / moratorium on the fade ... defaults / delinquencies loom ... will tighten credit further. MUCH further.

Stuki
Stuki

Nothing trumps Newspeak as a means to get pliant idiots to wrap themselves in flags for your amusement and profit; while being reliably dim enough to fall for nonsense as obvious to anyone literate as "Free Speech" having anything, at all, whatsoever, in common with "not allowed to report."

Ted R
Ted R

I got news for you pal, they never could. And investment banks are even worse. That is why our great country is broke. To many greedy and selfish morons are running our financial institutions.

PecuniaNonOlet
PecuniaNonOlet

The answer is obvious and simple: EVERYONE is a credit risk.

We are in a pandemic. Will it last 6 months? 2 years? 10 years? Endless?

If you get cv19, you may go to the hospital and exit with a 30k bill or is it 100k? What if you die? How does that impact the family? Impact to productivity and debt is instantaneous.

If you dont get sick from cv19 this round will you get it next round when it mutates?

If you can’t fundamentally determine the future health of people who are your consumers and workers/producers then how can you risk manage anything that derives from it?

anoop
anoop

just ask google and facebook. they know everything about everybody.

Roger_Ramjet
Roger_Ramjet

Not sure what is happening here in Western North Carolina, but homes are going under-contract at an incredible rate. Against the backdrop of so many loans in default or forebearance, and all of the issues that you bring up in your coverage, its hard to wrap my head around the ultra aggressive rush into the housing market. One of our neighbors even received an unsolicited call offering to purchase their home in cash.

I'm wondering if this is not private equity and single-home-for-rent REITs taking the Fed's cheap financing, buying up the inventory and turning an even larger portion of the populace into lifetime renters. Could this be yet another "unintended" consequence of the Fed's ZIRP that could now exacerbate income and wealth inequality to an even greater degree?

AWC
AWC

In the end, whichever banks take on the most risk, will receive the most “generous” Fed bailout. They haven’t yet figured that out, but they will. Then it will be balls out to see who can issue the most sub-sub-sub prime loans. The higher the default rate the better the bailout.

AWC
AWC

“Got Gold?”

Yeah, sure, from back in ought one, when it was on sale. But now? At $1800? And with it dead center in the Fed’s crosshairs? No thanks. Think I’ll keep the powder dry, and wait for some more of that discounted oil and RE to come rollin’ down the pike.

Six000mileyear
Six000mileyear

My girlfriend was contacted by Amazon about her Amazon credit card. She has never used it in 20 years, so they cut her limit from $10K down to $5K. Target also contacted her because the saw no activity on her Target credit card in a while. They wanted to know if she had lost the card. The limit cut was deflationary since it directly reduces the amount of debt (what Amazon borrows in anticipation my girlfriend will borrow) in the system. I suspect Target was probing before taking similar actions.


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