The WSJ reports on the wave of consumers falling back on deferments and payment holidays. It is the sign of things to come in managing delinquency.
Lenders in April had nearly 15 million credit cards in “financial hardship” programs, such as deferral programs that let borrowers temporarily stop making payments, according to estimates by credit-reporting firm TransUnion. That accounts for about 3% of the credit-card accounts the company tracks, TransUnion said Wednesday.
But, is this the tip of the iceberg? With unemployment running north of 20%, more will undoubtedly follow.
The spike in unemployment caused by the coronavirus has strained people’s ability to make their monthly debt payments. To make matters worse, Americans were tapping credit cards and auto loans at record levels even before the pandemic to deal with rising costs and stagnant incomes.
As coronavirus cases surged in the U.S. and businesses shut down, millions of people told their lenders they wouldn’t be able to pay their bills. Some lenders have allowed borrowers to miss payments for as long as several months on credit cards, auto loans, and personal loans.
Credit cards are not alone.
About 840,000 personal loans were in deferment or another type of financial hardship in April, accounting for 3.6% of those tracked. TransUnion’s estimates include accounts where the borrowers are pausing their payments with permission, as well as accounts that have been frozen.
Lenders hope that being flexible with borrowers will buy time for the economy to recover and for consumers to get back on track with payments. But lenders can shoulder the unpaid loans for only so long, and many are bracing for a mountain of defaults that they’ll eventually write off as a loss.
Deferments are a bellwether for future delinquency. Deferments will help with a bridge for three to six months. But that is a big bet. Will unemployment be corrected by then? After the Great Recession, it took four years to return to normal. No one knows the answer.
There are three issues with deferments. They temporarily forestall account delinquency aging; by doing so, the term of the debt gets extended. Next, payment suspensions are a bet that people will be back to work by a specific date, and we are not too confident when that will happen. Thirdly, the actual credit quality of a portfolio gets masked because contractual delinquency becomes suppressed.
For now, this is the best solution there is, but the issue is broader. Getting back to work is the crux of the problem.
Overview provided by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group.