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Millions of Credit-Card Customers Can’t Pay Their Bills. Lenders Are Bracing For Impact (#GotBitcoin?)

Credit-card debt kept many consumers afloat. Now that the debt bubble is bursting, lenders and borrowers alike are preparing for pain. Millions of Credit-Card Customers Can’t Pay Their Bills. Lenders Are Bracing For Impact (#GotBitcoin?)

Millions of Credit-Card Customers Can’t Pay Their Bills. Lenders Are Bracing For Impact (#GotBitcoin?)

Florida Couple Migdalia Wharton And Robert Rodriguez Are Struggling With Their Bills. ‘We Don’t Know What We’re Going To Do,’ He Said.

Robert Rodriguez and Migdalia Wharton, a married couple in Orlando, Fla., have been out of work for more than a month and can’t afford to pay their credit-card bills.

When they called Capital One Financial Corp. to explain, the bank told them they could skip their April payments. But they doubt they will have money in May. Ms. Wharton, a school-bus driver, was told she wouldn’t get paid until school reopens. Mr. Rodriguez, a cancer survivor, is worried for his health and has stopped driving for Uber.

“We don’t know what we’re going to do,” Mr. Rodriguez said.

Millions of Americans are skipping their credit-card payments as the coronavirus pandemic puts them out of work. Banks and other lenders that for years relied on heavy consumer spending to create big profits are preparing to struggle alongside their customers.

As the economy spirals, credit-card payments are one of the first places where the effects will show up. They are often the first loans people stop paying when money is tight. They are usually unsecured, which means lenders have little recourse if a borrower stops paying.

Many large card issuers, including Capital One, Discover Financial Services and Synchrony Financial, are letting borrowers pause their credit-card payments for a month or longer. Some are lowering or waiving late fees and interest charges, or even forgiving portions of customers’ balances.

Those suspensions will allow some borrowers to stay afloat, but only temporarily. Companies and analysts expect delinquencies and charge-offs to soar later this year. Banks and other lenders can only shoulder the unpaid loans for so long before they face a reckoning too.

Millions of Credit-Card Customers Can’t Pay Their Bills. Lenders Are Bracing For Impact (#GotBitcoin?)

Shares of Discover and Synchrony have lost more than half their value so far this year. That is far worse than the broader market, which has declined about 12%, and sectors less exposed to unemployment worries, such as technology, health care and consumer staples.

Discover and Synchrony said this week that they have allowed hundreds of thousands of borrowers to defer their payments, including many credit-card customers. Capital One, which has roughly 120 million credit-card accounts in the U.S., according to the Nilson Report, said it enrolled 1% of its active card accounts into deferral programs. The three banks are a good gauge of the financial health of a swath of American consumers. Discover and Synchrony generally don’t market to affluent customers, and Capital One has a large number of customers with less-than-pristine credit scores.

Banks hope that delaying payments will buy time for the economy to recover and consumers to get back on track. But for people who have no idea when they will be back at work, that likely won’t be enough. Many Americans were already overstretched even before the pandemic, tapping credit cards and other debt at record levels to keep up with soaring costs for college, health care, housing and other expenses.

Marena Owens called Synchrony in March to ask about deferring payments on her T.J. Maxx, American Eagle Outfitters Inc. and J.C. Penney Co. cards. She accepted an offer to skip the April payments on two of the cards, and to erase the roughly $50 balance on her J.C. Penney card. Ms. Owens lost her job at an Ohio car dealership the same week.

Unsure of when she might return to work, Ms. Owens called Synchrony again this week, and was told she could defer her T.J. Maxx payment due in early May for another month. She is planning to ask for the same reprieve on her American Eagle card.

“I probably won’t pay if they’re not willing to work with me,” she said.

A Synchrony spokeswoman said the bank “is here to assist our customers…who are experiencing financial hardship as a result of this crisis.”

Discover, Capital One, American Express Co., JPMorgan Chase & Co. and other card issuers have together socked away billions of extra dollars to prepare for big potential loan losses.

“We clearly have already had significant deterioration,” said Roger Hochschild, Discover’s chief executive, in an interview. “This was very quick and cataclysmic.”

Some lenders are also tightening the credit available to new applicants or existing customers.

Banks including Citigroup Inc., Discover and Synchrony are shutting down credit cards that haven’t been used in a while or lowering spending limits. The companies say they were taking these measures before the pandemic as a way to lessen risk. But those moves could also leave some borrowers without access to credit just when they need it most.

Missed payments, though, aren’t the only problem for card issuers.

Millions of Credit-Card Customers Can’t Pay Their Bills. Lenders Are Bracing For Impact (#GotBitcoin?)

Marena Owens Contacted Synchrony To Ask About Deferring Her Credit-Card Payments. ‘I Probably Won’t Pay If They’re Not Willing To Work With Me,’ She Said.

As the economy spirals, credit-card payments are one of the first places where the effects will show up. They are often the first loans people stop paying when money is tight. They are usually unsecured, which means lenders have little recourse if a borrower stops paying.

Many large card issuers, including Capital One, Discover Financial Services and Synchrony Financial, are letting borrowers pause their credit-card payments for a month or longer. Some are lowering or waiving late fees and interest charges, or even forgiving portions of customers’ balances.

Those suspensions will allow some borrowers to stay afloat, but only temporarily. Companies and analysts expect delinquencies and charge-offs to soar later this year. Banks and other lenders can only shoulder the unpaid loans for so long before they face a reckoning too.

Shares of Discover and Synchrony have lost more than half their value so far this year. That is far worse than the broader market, which has declined about 12%, and sectors less exposed to unemployment worries, such as technology, health care and consumer staples.
Marena Owens contacted Synchrony to ask about deferring her credit-card payments. ‘I probably won’t pay if they’re not willing to work with me,’ she said.

Discover and Synchrony said this week that they have allowed hundreds of thousands of borrowers to defer their payments, including many credit-card customers. Capital One, which has roughly 120 million credit-card accounts in the U.S., according to the Nilson Report, said it enrolled 1% of its active card accounts into deferral programs. The three banks are a good gauge of the financial health of a swath of American consumers. Discover and Synchrony generally don’t market to affluent customers, and Capital One has a large number of customers with less-than-pristine credit scores.

Banks hope that delaying payments will buy time for the economy to recover and consumers to get back on track. But for people who have no idea when they will be back at work, that likely won’t be enough. Many Americans were already overstretched even before the pandemic, tapping credit cards and other debt at record levels to keep up with soaring costs for college, health care, housing and other expenses.

Marena Owens called Synchrony in March to ask about deferring payments on her T.J. Maxx, American Eagle Outfitters Inc. and J.C. Penney Co. cards. She accepted an offer to skip the April payments on two of the cards, and to erase the roughly $50 balance on her J.C. Penney card. Ms. Owens lost her job at an Ohio car dealership the same week.

Unsure of when she might return to work, Ms. Owens called Synchrony again this week, and was told she could defer her T.J. Maxx payment due in early May for another month. She is planning to ask for the same reprieve on her American Eagle card.

“I probably won’t pay if they’re not willing to work with me,” she said.
Credit-card balancesSource: Federal ReserveNote: Data are as of February of each year, seasonallyadjusted; based on revolving consumer credit that ismostly comprised of cards
.trillion
2010’12’14’16’18’200.00.20.40.60.81.0$1.2

A Synchrony spokeswoman said the bank “is here to assist our customers…who are experiencing financial hardship as a result of this crisis.”

Discover, Capital One, American Express Co., JPMorgan Chase & Co. and other card issuers have together socked away billions of extra dollars to prepare for big potential loan losses.

“We clearly have already had significant deterioration,” said Roger Hochschild, Discover’s chief executive, in an interview. “This was very quick and cataclysmic.”

Some lenders are also tightening the credit available to new applicants or existing customers.

Banks including Citigroup Inc., Discover and Synchrony are shutting down credit cards that haven’t been used in a while or lowering spending limits. The companies say they were taking these measures before the pandemic as a way to lessen risk. But those moves could also leave some borrowers without access to credit just when they need it most.

Missed payments, though, aren’t the only problem for card issuers.

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Card spending in travel and other categories is plummeting, which means banks won’t get as much revenue from the swipe fees they collect when consumers pay with cards. And since people under stay-at-home orders aren’t out shopping, many of them are spending less on the store credit cards they have. That is a problem for issuers that specialize in store cards, including Synchrony and Alliance Data Systems.

“For the next two years or so until everything settles, [credit cards] will be much less profitable and more risky,” said Brian Riley, director of credit advisory services at Mercator Advisory Group.

In Orlando, Mr. Rodriguez and Ms. Wharton used their Capital One credit cards to buy groceries, toilet paper and medicine for several weeks after they found themselves out of work. They recently were approved for food stamps.

They told Capital One they might not be able to pay their bills in May, either. They said they were told to call back at the end of April if they are still in financial distress.

Updated: 8-25-2020

Before Making Loans, Some Mortgage Lenders Ask, Do You Really Plan To Pay This?

New forms are showing up in some borrowers’ paperwork when they close on their home loan. Lenders are asking them to confirm that they don’t plan to skip their payments, at least not right away.

Some mortgage lenders are asking customers taking out a mortgage to confirm they don’t intend to seek forbearance, a move meant to keep losses low during a pandemic that has put millions of Americans on shaky financial footing.

The unusual requirement comes in the form of a new document included in many borrowers’ closing paperwork. While the language varies, the forms generally tell borrowers that they won’t be allowed to skip payments until their loans are backed by the government, according to forms reviewed by The Wall Street Journal.

The forms, known among lenders as “Covid-19 borrower certifications,” often ask home buyers to confirm that they don’t expect changes to their income. Some warn of potential penalties if any of the certifications are later proven to be false.

The $2 trillion coronavirus stimulus package Congress passed in the pandemic’s early days allows struggling homeowners to request up to 12 months of forbearance on federally backed home loans, meaning they can temporarily pause their payments and make them up later. But it can take days, weeks or sometimes even months for a newly made loan to get government backing.

Lenders can still unload loans that are already in forbearance. Government-backed mortgage companies Fannie Mae and Freddie Mac said this spring they would begin to buy loans in forbearance, but at a discount of either 5% or 7% of the loan’s value, depending on whether the borrower is a first-time homebuyer. The Federal Housing Administration said it would insure loans in forbearance but could charge the lender a 20% fee if the loan goes into foreclosure.

Together, Fannie Mae, Freddie Mac and the government-owned mortgage company, Ginnie Mae, back more than 70% of outstanding U.S. mortgages, according to the Urban Institute, a nonpartisan policy research group in Washington, D.C.

Lenders are struggling to figure out which borrowers will be able to pay back their loans. The current recession has made it particularly hard to determine who is creditworthy: Millions of Americans are behind on their debts, but their missed payments aren’t reflected in their credit scores or uniformly recorded on their credit reports because of protections in the stimulus law.

Many lenders have responded by tightening credit. Credit-card issuers are closing accounts and lowering credit limits. The Mortgage Bankers Association’s Mortgage Credit Availability Index, designed to gauge access to a variety of mortgage products, shows consumer access to home loans fell about 17% between March and July.

For mortgage lenders, the forbearance penalty is an added concern. “The hit more than wipes out your margin—over something you have no control over,” said Esther Phillips, senior vice president of sales at Key Mortgage Services Inc.

“You can’t control what customers do after you close.” Key’s form asks borrowers to certify they haven’t applied for forbearance from any mortgage payments and have no plans to ask for it.

Adrian Leal was surprised when one of the mortgage lenders he was considering asked him to sign such an agreement in the late spring. The form, from LoanPeople LLC, asked him to confirm that he had no plans to request a forbearance.

At first, Mr. Leal thought it meant his home loan would never be eligible for forbearance. He now believes the letter meant he wouldn’t be eligible for forbearance until a government agency agreed to buy or insure his mortgage.

He is still employed as a software engineer but said he would turn to forbearance if he lost his job.

“I’ve never bought a home before, so I needed to be careful,” Mr. Leal said.

The share of mortgages in forbearance, 7.2%, has declined for 10 straight weeks, according to the Mortgage Bankers Association, but is still far above pre-pandemic levels. The Urban Institute has estimated that just 3,750 loans will be subject to the forbearance penalty.

But lenders are still doing everything they can to avoid it, including tightening credit, with wide-ranging effects. Many have raised minimum credit scores and lowered maximum debt-to-income ratios.

Bernadette Kogler, chief executive of RiskSpan, a mortgage analytics firm, said lenders are going to pull back on credit and “make fewer loans that might go into forbearance.”

The resulting credit pullback will limit purchase and refinance opportunities for up to 255,000 consumers, the Urban Institute said. The share of consumers with credit scores below 700 who purchased or refinanced a home fell in the first half of the year.

Verifying that mortgage applicants have a job, a typical part of the lending process, has become a major concern for lenders during a time of high unemployment.

Dustin Adair said his credit union called his office to make sure he still worked there six times between his loan’s approval and the closing on his Austin, Texas-area home this month.

Mr. Adair, a legal assistant, understands the rigorous vetting. He was furloughed for about two months in early spring when the lawyers at his office began working from home, delaying his quest for mortgage preapproval.

“Every day I go into work, I think, ‘Well, what’s going to happen if we go back into quarantine for another three months?’” Mr. Adair said.

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