DEBT RELIEF FOR U.S. CONSUMERS LEAVES INVESTORS FLYING BLIND / THE FINANCIAL TIMES OP EDITORIAL

Debt relief for US consumers leaves investors flying blind

Forbearance and federal support programmes disguise how badly Americans have been hit

Robert Armstrong


Investors will not have information about who is, and who is not, able to pay their debts © AFP via Getty Images


If the US is flying towards a consumer credit crunch, it is flying blind.

This is not just because the duration of the lockdown is unknown. From the perspective of credit, the present is a mystery too.

This is because the forbearance and payment deferral programmes that the government and lenders have put in place will deprive investors of information about who is, and who is not, able to pay their debts.

The federal bailout law permits mortgage holders up to 12 months of payment forbearance, without consequences for their credit score or for the lender’s delinquency rates.

Other providers of consumer credit — credit card banks, auto lenders, and so on — are offering three months or more of payment deferrals. Consumers do not need to document that they are under duress; they just have to ask.

The result is that investors are left to look at lenders’ disclosures of forbearance take-up, and at loan volume trends, and make uneducated guesses about how these will translate into delinquencies and write-offs in the months and years to come.

There was a lot of consumer debt sloshing around when this crisis began: $14.3tn of it, $1.6tn above the financial crisis peak, according to the New York Fed’s quarterly household debt report.

Yes, the debt burden was historically low because of low interest rates; debt payments have hovered under 10 per cent of household disposable income for several years. But even before Covid-19 emerged, there were worrying trends, leading the bearish to talk of a turn in the cycle. Auto loan and credit card delinquencies have been ticking steadily up since 2017, for example.

The set-up is not great, then.

But — and one almost does not want to say this out loud — there are signs that the consumer is holding up so far.

Both Visa and Mastercard, which operate the largest card payment networks, reported big drops in spending across their rails in the first quarter © AP



When the shutdown began, all eyes were on credit cards.

The rule of thumb has been that card lenders’ write-offs and unemployment peak at about the same level, as they did at the last crisis. Would the unemployed start to put day-to-day expenses on their cards, and begin to fall behind?

In the event, the opposite has happened.

Both Visa and Mastercard, which operate the largest card payment networks, reported big drops in spending across their rails in the first quarter — and what spending there was, happened mostly on debit cards. Visa reported that credit card spending was down about 30 per cent through much of April.

Unsecured consumer loans at US banks, meanwhile, are 8 per cent lower than they were just six weeks ago, erasing two full years of loan growth.

Among mortgages, about 6 per cent held at banks are in forbearance, according to estimates from Autonomous Research.

Card payment deferrals are running at a broadly similar rate. Those numbers are not frighteningly high, if you assume a significant proportion of those borrowers will get back on track when the crisis passes. And being in forbearance is not the same as being unable or unwilling to pay.

Flagstar Bank, a mortgage specialist, reported last week that some 11 per cent of its borrowers had requested forbearance, but half of those had made their April payments anyway. A few other banks gave similar indications. A similar pattern has appeared in non-card unsecured lending.

Both Lending Club and OneMain specialise in credit-card consolidation loans, and both have noted that after an initial spike in requests for payment deferrals, requests have slowed notably in recent weeks.

Doug Shulman, chief executive of OneMain, said on an earnings call last week that some customers who accepted deferrals early on have started paying again.

“There’s a number of customers either who have some kind of lumpy expenses because of [a] specific issue or got their government stimulus check . . . and [then] were able to pay,” he said.

Lending Club pointed out this week that customers who requested payment deferrals tended to be good borrowers. More than 90 per cent of them were up to date with their payments when they requested deferrals, and almost 80 per cent had never been delinquent on a payment before. This looks like caution, not desperation.

One obvious reason that the early signals have been reasonably encouraging is that the federal government has been pushing cash into consumers’ pockets.

The small business bailout programme has passed $350bn to small businesses, earmarked specifically for paying workers, and more is on its way.

Direct consumer stimulus payments, worth $1,200 for an individual or $3,400 for a family of four, have begun to hit bank accounts.

The bailouts are good news for investors in credit. But, like the forbearance offers, they obscure the underlying picture.

At some point, special measures will expire, the stimulus cheques will be spent — and we will discover how badly the American consumer has been hurt.

Until then, analysis will have to be supplemented with a lot of guesswork.