The big question about COVID-19 is “when will the economic mess end?” Credit card issuers and other lenders aggressively arranged three and six-month deferments, but what will happen if the economy does not recover by August or November. Will sovereign efforts be able to prop up delinquent consumers perpetually? Will so many consumer budgets become mangled that secured and unsecured debt be unprioritized as consumers struggle to pay food, healthcare, and shelter? Today’s WSJ poses that question.
Lending Tree, which is under stress, has an optimistic view:
“Once we are on the other side, many of the borrowers that are suffering right now will be in a better financial position to meet their financial obligations. But we will have to have permanent forgiveness for some customers,” said Tendayi Kapfidze, chief economist at LendingTree Inc., an online lending marketplace.
A large part of the challenge is the length in which lenders can afford to defer payments.
“It depends on the cash position and the access to cash that each individual business has,” said Philip Noftsinger, vice president of finance and corporate controller at CBIZ Inc., a professional services company.
Ford Motor Credit Co. LLC, the financing arm of the U.S. car manufacturer, meanwhile, is offering changes to payment schedules as well as a deferral of monthly payments.
That is not to say that credit card issuers are trying, in fact:
American Express already is seeing signs of consumers in trouble. The company said of the 845,000 account holders that joined its customer pandemic relief program through mid-April, many already have made some payments since they enrolled, AmEx finance chief Jeffrey C. Campbell said in the April earnings call. This time around, the company’s relief efforts provide a range of options to consumers, whereas, in 2008, AmEx mainly provided short-term help to card customers.
JPMorgan is providing payment relief for hundreds of thousands of consumer accounts, including offering 90-day grace periods for mortgage, auto, and car payments, as well as waiving or refunding certain fees. The company also paused foreclosures and auto repossessions, Jennifer Piepszak, chief financial officer of JPMorgan, said on an April earnings call.
Synchrony Financial, a credit card issuer and provider of consumer financing tools is waiving late fees and interest charges. It is deferring minimum payments for up to three months and extending certain promotions. About 800,000 account holders took advantage of these options during the first quarter, finance chief Brian Wenzel said on an April 21 earnings call took advantage of these options during the first quarter, finance chief Brian Wenzel said on an April 21 earnings call.
Portfolios were strong before COVID took its toll, but delinquencies were trending up slightly.
Consumer debt was on the rise even before the pandemic hit.
Household debt rose to $14.3 trillion in the quarter ended March 31, $1.6 trillion higher than the 2008 record, according to the Federal Reserve Bank of New York. While auto loans increased to $1.35 trillion, credit-card debt came down during the quarter to $890 billion, according to the bank. That compares with $790 billion in auto loans and $870 billion in credit card debt at the end of 2008.
Deferments forestall aging for a short period of time, however, sooner or later, you must pay the piper.
Forbearance programs, such as those offered by car companies, allow lenders to avoid an increase in delinquencies in the short term, according to Fitch Ratings. “But it will likely delay the inevitable charge-offs,” Fitch analysts said in a note last month.
While forbearance programs do offer hope by delaying payments, the worry is “what happens if the economy does not rebound as everyone hopes.”
Overview provided by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group.
