Consumers Face A Massive Credit Crunch. Lenders Are Still Figuring Out What To Do (#GotBitcoin?)
Out-of-work customers could miss loan payments and suffer plunging credit scores; lenders and credit-reporting firms are being asked to help. Consumers Face A Massive Credit Crunch. Lenders Are Still Figuring Out What To Do (#GotBitcoin?)
U.S. consumers are facing what could become the biggest credit crunch since the Great Depression. Lenders and credit-reporting firms aren’t sure what to do about it.
As coronavirus spreads, thousands of wait staff, bartenders and airline employees are out of work and could be on the brink of missing payments on mortgages, credit cards and other loans.
Lenders have yet to report a spike in missed payments, but the impact could be considerable. If borrowers start defaulting, they could lose homes and cars. In the longer term, those delinquencies could get factored into their credit reports, hurting their ability to borrow for many years.
Some lenders already have announced programs meant to help. Citigroup Inc., for example, is increasing spending limits for certain cardholders on a case-by-case basis, including those with rising out-of-pocket medical expenses. JPMorgan Chase & Co. is delaying due dates for some borrowers on cards, auto loans and mortgages. Goldman Sachs Group Inc. is allowing borrowers who have personal loans from its consumer bank, Marcus, to sign up to delay their payments for a month.
Still, the expected economic slowdown could devastate many U.S. consumers, who already were overstretched before the coronavirus pandemic. Americans have been falling deeper into debt over the past decade as costs have climbed but incomes have largely failed to keep pace. Consumer debt balances, including credit cards, auto loans and student loans, are around record levels.
Lenders and credit-reporting firms are still reviewing what they might do for consumers. Some think relief should be offered to all borrowers, or all who ask for it. Another option, requiring people to prove they were directly affected by the coronavirus, could be impractical given the virus’s far-reaching economic effects. That also would become logistically harder if companies have to move customer-service representatives from call centers to work from home.
Lawmakers and others have asked the main U.S. credit-reporting firms, Equifax Inc., Experian PLC and TransUnion, what they can do to limit the damage to consumers’ credit standing if they miss loan payments. Representatives from the White House National Economic Council have been in touch with credit-reporting firms, according to people familiar with the matter. So have staffers representing Sen. Mike Crapo (R., Idaho), Rep. Maxine Waters (D., Calif.) and Sen. Mitt Romney (R., Utah).
Generally, lenders submit information about their borrowers, including missed payments, to the credit-reporting firms. Those firms in turn compile and sell that information back to lenders to help them decide whom to lend to. That information also is used to help calculate people’s credit scores.
Most lenders haven’t said if they will avoid reporting missed payments to the credit-reporting firms as the pandemic spreads. And the credit-reporting firms as of now plan to continue including missed payment information they receive on credit reports.
An exception is Discover Financial Services, which said it won’t report missed payments to credit-reporting firms for some borrowers for at least two months. That will cover loans including credit cards, personal loans and private student loans, and will mainly apply to consumers who have previously been on time with payments.
The Consumer Data Industry Association, which represents credit-reporting firms, says it is evaluating ways to serve consumers and the economy. Consumers who have concerns should contact their lenders, it says.
Government officials also have been in talks with mortgage companies about how they can help consumers, according to people familiar with the matter. In response, the industry has been working on plans tailored to the current crisis that could be enacted quickly.
Mortgage companies already offer so-called forbearance plans in certain situations, in which borrowers can temporarily stop making mortgage payments and make them up later.
Federal regulators can require mortgage companies to consider this option for consumers who can show they are facing some sort of hardship, such as a lost job, if the loan is backed by the government. The Federal Housing Finance Agency, which regulates Fannie Mae and Freddie Mac, and the Federal Housing Administration highlighted this option to servicers last week.
Regulators also can require mortgage companies to consider letting borrowers pause payments when a natural disaster hits. The policy typically applies within a defined geographic area.
Fannie and Freddie said Wednesday they would expand forbearance options so that borrowers affected by the coronavirus can request to pause payments. The two mortgage giants and the FHA will also suspend foreclosures for 60 days.
Many housing experts say the current set of tools to help struggling homeowners is ill equipped for the coronavirus. For example, some homeowners say that accepting pause-payment plans after a natural disaster left them worse off, The Wall Street Journal has reported.
Mortgage industry players say they want a plan that would streamline approval for offering relief to borrowers hurt by the pandemic, and in a way that doesn’t hurt borrowers’ credit scores.
“This shouldn’t be involving a credit hit for people,” said Ed DeMarco, president of the Housing Policy Council and the former head of the FHFA. “Everyone was living their lives and doing their jobs and this is a health emergency.”
The industry is also suggesting a liquidity facility that would allow servicers to bridge the gap between borrowers who aren’t making payments and mortgage investors who still expect to be paid, according to Bob Broeksmit, president and chief executive of the Mortgage Bankers Association.
Consumer Spending Fell A Record 13.6% In April
Personal income rose 10.5% on impact of federal-stimulus payments; signs emerge that purchases are slowly starting to pick up.
Consumers spent significantly less and saved more as they weathered the coronavirus pandemic and related lockdowns in April, with recent signs suggesting damage from the crisis is starting to ease.
U.S. consumer spending, the U.S. economy’s main engine, fell by a record 13.6% in April, the steepest decline for records tracing back to 1959.
Personal income, which includes wages, interest and dividends, increased 10.5% in April, the Commerce Department reported Friday. The jump reflected a sharp rise in government payments through federal rescue programs, primarily one-time household stimulus payments of $1,200. Unemployment insurance payments also rose sharply in April, helping make up for some of the 8% decline in wages and salaries tied to job losses.
Weak April spending, which economists say could be the bottom, adds to the evidence that the U.S. economy is in for a long, slow recovery. But gradual May reopenings of state economies and government support of businesses and households have led to a recent easing of job losses and a slight uptick in spending.
“Some of the data suggests a stabilization,” said Kathy Bostjancic, chief U.S. financial economist at Oxford Economics. “It’s still overall a very tentative, slow recovery.”
As businesses shuttered during the pandemic, household spending fell, personal savings rose and income increased due to government stimulus.
Camelia Kuhnen, finance professor at UNC-Kenan Flagler Business School, said that workers in industries hard hit by the coronavirus, like retail and tourism, will remain uncertain about the economic outlook for a while, even with states reopening their economies.
“It’s going to probably lead these people to be very, very careful with spending their money,” Ms. Kuhnen said.
Americans’ expectations about the economy’s trajectory soured in May, according to a University of Michigan Survey released Friday. The Michigan survey’s consumer expectations index fell to 65.9, from 70.1 in April.
Concerns about the path of the economy was a factor behind a sharp rise in savings in April. The personal-saving rate, which is the difference between disposable income and spending, surged to 33% in April from 12.7% in March and 8.2% in February, the month before widespread shutdowns.
Tracy Miller, 46, of Eagle, Colo., was in the market for buying a new car this spring until the pandemic caused clients to cancel bookings for her catering services. She lost her primary source of income as a result.
“I definitely decided that big purchase was not going to happen until I have some revenue,” she said. Ms. Miller said she weathered the crisis by deferring mortgage payments until July. She is also drawing on unemployment benefits of about $800 a week through a federal program for gig-economy and self-employed workers.
“I’m just trying to stay afloat and not spend a lot,” she said.
In April, consumers pulled back on services, cutting spending on restaurants and hotels by half compared with April 2019. Health-care expenditures fell nearly 40% from a year ago.
The consumption crunch hit goods almost as hard. Spending on autos shrank more than 30% from April 2019, while furniture and appliance outlays fell by one-fifth. Americans shelled out half as much on clothes and shoes as they did in April 2019.
The Commerce Department report showed money from the transfer-payment program in the federal rescue package, which provided $1,200 to most adults and $500 per child, accounted for the bulk of gains in April personal income. The government had issued nearly 90 million “stimulus checks” by April 17, and an additional 40 million payments the following week.
Marshal Cohen, chief analyst at the NPD Group Inc., a market-information and advisory-services firm, said spending on discretionary items such as fashion, footwear, beauty and apparel—all of which had shrunk by more than half versus the previous year—began picking up around that time. Home improvement spending jumped then, too.
Still, the stimulus checks were one-time payments whose economic effect will fade.
Consumers spent almost half of their federal stimulus checks in the two weeks after receiving them before reverting to prior spending habits, according to a study by the Chicago Federal Reserve.
Expanded unemployment benefits, including $600 a week tacked on to the regular weekly benefit amount, will provide a temporary, but longer-lasting, impact than the stimulus payments.
“We’re seeing consumers spend again because they’re collecting ‘employment plus’—meaning unemployment [benefits] are more than what they were making,” Mr. Cohen said.
Spending on some goods and services weathered April unscathed. Financial services and insurance expenditures rose 3.3%, compared with the same month in 2019. Americans also spent slightly more on housing and utilities, as well as on groceries and other food and drinks bought for at-home consumption.
Spending on many services has recovered some since April, private-sector data show.
Restaurant sales bottomed out in mid-April, down by one-third from 2019, according to Earnest Research data, and have started to climb again. However, fast-food and establishments more suited to online sales have fared better than upscale eateries.
Slim Chickens, a Southern-style restaurant chain serving chicken tenders, wings and salads, experienced a sharp drop in year-over-year sales when dine-in services were forced to close in March.
The Fayetteville, Ark.-based company began ramping up the number of employees helping with drive-through and further invested in its online ordering site. That helped drive up sales significantly beginning in the second week of April, said Tom Gordon, chief executive of the restaurant.
“We were able to weather the storm, and get back on the right track,” he said.
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