Banks Are Flying Blind
Businesses are not allowed to report to the credit agencies who is in mortgage, credit card, or auto loan forbearance plans.
So how do banks decide who is a good credit risk when they are Flying Blind?
“Without accurate information, their only option is to pull back on credit,” said Michael Abbott, head of banking for North America at consulting firm Accenture PLC. “Banks don’t know who is going to pay and who isn’t. It’s like flying blind into a credit storm.”
Banks started tightening their underwriting standards in March, when the first wave of coronavirus layoffs began.
By early April, 33% of banks that responded to the Federal Reserve’s senior loan officer survey said they had increased their minimum credit-score requirements for credit cards over the previous three months, up from 14% in January. Bank respondents tightened lending standards for all consumer-loan categories tracked by the survey.
Loan originations have fallen, a result both of the tightening and a decline in consumer demand. An estimated 79,000 personal loans were extended in the week ended May 10, compared with 226,000 in the week ended March 22, according to Equifax Inc. Auto loan and lease originations fell to 266,000 from 390,000 during the same period. General-purpose credit-card originations totaled 483,000, down from 856,000. In 2019, weekly card originations rarely fell below 1.2 million.
Some lenders pay for phone data to see who is calling the unemployment office. Other lenders are using natural disaster codes instead of late payment codes.
TransUnion is providing data to lenders to help them determine whether consumers have been affected by the pandemic. This data can be used by lenders and insurers to help them better support impacted consumers. The data cannot be used to deny a person credit.
Fair Isaac is rolling out a new index to inform lenders how likely the applicant is to withstand financial difficulties during the downturn.
Lending Standards Tightest in Six Years
Mortgage Applications
At Least 20 Million Out of Work
Impossible to Sugarcoat the Disastrous Unemployment Claims
There are close to 20 million unemployment claims a the state level. That does not count perhaps as many as another 10 million in federal payment protection programs.
For discussion, please see Impossible to Sugarcoat the Disastrous Unemployment Claims.
Mortgage Forbearance On the Rise
Mortgage forbearance plans topped the $1 trillion mark in unpaid principal last week.
These loans are not reported to credit agencies as delinquencies.
For details, please see Mortgage Forbearances Rise for the First Time in 3 Weeks
Since banks have no idea who is paying the bills, they have curtailed credit.
Meanwhile, reopenings are in reverse in several place including Arizona, Texas, and Florida.
Reopenings in Reverse
- Drinking Banned at Florida Bars and What About the NBA?
- Texas Shuts Bars at Noon as Covid Cases Surge
The only solution is more free money.
Got Gold?
In case you missed it, please see More Gold Hype: No Escape for Shorts
Mish
My girlfriend was contacted by Amazon about her Amazon credit card. She has never used it in 20 years, so they cut her limit from $10K down to $5K. Target also contacted her because the saw no activity on her Target credit card in a while. They wanted to know if she had lost the card. The limit cut was deflationary since it directly reduces the amount of debt (what Amazon borrows in anticipation my girlfriend will borrow) in the system. I suspect Target was probing before taking similar actions.
Not sure what is happening here in Western North Carolina, but homes are going under-contract at an incredible rate. Against the backdrop of so many loans in default or forebearance, and all of the issues that you bring up in your coverage, its hard to wrap my head around the ultra aggressive rush into the housing market. One of our neighbors even received an unsolicited call offering to purchase their home in cash.
I’m wondering if this is not private equity and single-home-for-rent REITs taking the Fed’s cheap financing, buying up the inventory and turning an even larger portion of the populace into lifetime renters. Could this be yet another “unintended” consequence of the Fed’s ZIRP that could now exacerbate income and wealth inequality to an even greater degree?
You probably hit the nail on the head with all of your wondering EXCEPT for (and I did notice you put it in quotes) “unintended” consequences … I believe these could be fully INTENDED consequences on behalf of their crony capitalist friends, as perhaps the quotes indicate you do …
Same in Western NY. Housing is on fire. 20 and 30 offers. Loan Depts are swamped. RE is nazzy on steroids
just ask google and facebook. they know everything about everybody.
I got news for you pal, they never could. And investment banks are even worse. That is why our great country is broke. To many greedy and selfish morons are running our financial institutions.
Financialization.
Back in the “old days” a bank would keep a loan on its books … and lending officer responsible … too many “uh ohs” and officer loses job.
Now?
Way too many loans are bundled with other loans and securitized … with originating bank taking its cut up front … loss is someone else’s problem.
The thing that bothers me is that I’ve not figured out a way to either kick the asses of the greedy and selfish morons, or to join them.
Nothing trumps Newspeak as a means to get pliant idiots to wrap themselves in flags for your amusement and profit; while being reliably dim enough to fall for nonsense as obvious to anyone literate as “Free Speech” having anything, at all, whatsoever, in common with “not allowed to report.”
“Since banks have no idea who is paying the bills, they have curtailed credit.”
…
Yes … the downhill snowball just getting started.
With stimulus / forbearance / moratorium on the fade … defaults / delinquencies loom … will tighten credit further. MUCH further.
Banks have access to everyone’s financial information. It is easy to tell who is paying on time and who isn’t. They don’t need the credit agencies to do this. They can simply ask another bank.
I spent virtually my entire working life in banking and I can tell you with certainty that banks have absolutely no clue. After decades of mergers and wave after wave of endless layoffs, the quality of the staff at these places has dropped to a level that you would not believe. It is a miracle that they are even capable of processing a check these days.
Seems an easy problem to fix. Just go back to Collateral, Capacity, Character.
Should be easy to assess collateral. Capacity can be confirmed with a call to the reported employer, verifying reported income and job status. And character can be assessed by long term history.
That stuff was back in the nasty old days when the FNMA bought all the mortgages and had tight regulation over the market. These days banks create the MBS’ and sell them to unsuspecting rubes, so they can originate any garbage they want.
Needless to say, there are relatively few credit-worthy borrowers out there.
We are at the very end of a 100-year credit super-cycle. It will involve a painful adjustment to a much lower standard of living for most people. And that’s if we manage to avoid a hyper-inflation – which is far from certain at this point.
Japan has proven that below replacement birth rates are highly disinflationary. With our birth rate at 1.7 per women and falling fast there is no chance of any significant inflation. In fact deflation is likely to be a persistent problem.
Does it matter? The banks are already chock full loans that were probably destined to turn bad even before the unemployment hit. The fed will bail them out, as ever… Billions, Trillions, Squillions, it’s just a number. Damn the torpedos! FULL SPEED AHEAD!
Last time didnt they say never again.
“Never again is what you swore the time before.” — Depeche Mode, The Policy of Truth
And yet no one’s demoing against the Fed.
Most people don’t know what ‘the Fed’ is.
And that’s on them.
And they’re on us.
That’s what telling them “The Mexicans, The Chinamen and The Boogeymen did it,” is supposed to have accomplished. Seems to have worked so far.
Funny, I bought a house and my credit score dropped 28 points. I always thought being a homeowner improved your credit score, but here is the thing that bugs me, FICO is launching a new way to score people, all the same old metrics remain in place but they are adding a score from 1 to 99 with the lower your score the more resilient you are to economic downturns.
FICO rolls out new credit scoring model, but experts suggest it might not impact you yet
CNBC Select speaks to credit experts about FICO’s Resilience Index and how it can affect borrowers looking for new credit.
Updated Mon, Jun 29 2020
And why does this make me mad? Because my income might not be as high as yours is, and I may not have as much saved as you do, but, I can NEVER under any circumstances lose my income or have it reduced short of death or the dissolution of the United States. My income comes from the US Department of Veteran Affairs trust fund for disabled vets, and a smaller amount from the SS Trust Fund. I should score a 1 on this new scale, unless FICO has decided the government is no longer stable, or, they expect inflation to swamp fixed incomes to the point where they expect the public to prioritize consumption over bill paying out of necessity.
It is just another layer of income inequality masquerading as due diligence.
You have a choice. Save your money and pay cash. May be a bit more difficult, but you cut the ratings agencies, banks, and insurers out of that couple hundred grand of gravy.
Now maybe you don’t come out all that far ahead, after paying rent while saving for your house, but you do make those institutions that much weaker, lessening their power over everyone just a smidgen.
If you want to make a bigger difference, use your example to convince others it’s possible and desirable, and convince some to do the same. People are very monkey-see monkey-do.
It’s tough and you will have to work hard and compromise on what you think you deserve or should have but it can be done, I did it. As great as it is to not be sending away $20k to the banksters every year for the rest of my life ( Im almost 50 ) it feels even better knowing I finally “kinda” screwed them for once in my life.
Funny thing, the first morning I woke up in “my” (I own it as long as I pay the government their rent) house all I could think is I gotta get my brother and sister out of the debt slave trap. I thought it would’ve been a more enjoyable feeling.
Don’t be afraid to work hard and compromise!!
As Russell says, it’s tough, but honestly it’s easier than people think. One just has to decide, and then have the discipline necessary, to live within one’s means.
I bought a house during the last boom in 2002 – my first test of “ownership.” Went with the lender’s recommendation for cash-out financing with $30K to do the necessary remodels and upgrades.
Septic system failure and replacement along with structural issues not found during the inspection – for which the inspector has zero liability – and not covered by insurance led to a depletion of over half of those funds. As a result, I was able to get a new roof and some upgraded appliances, but the remodel itself would be piecemeal.
In 2008, the crash took the “value” of my house from $180K to $75K. I tried to hold out, but had to short sell in 2012 at a $60K loss. After that, and a disappearing wife leaving me with $30K in credit card debt she acquired in my name without my knowledge, I was in a bit of a pickle.
I decided at that moment that being in any kind of debt was insane and that I was no longer going to feed the beast. I would never own another house and never again willingly take on any debt.
I fought the card companies and won, took my lumps on the short sale, and since then I have lived debt-free and could not care less what my credit rating is. I rent a home which alleviates my responsibility for upkeep and maintenance – short of keeping it clean and keeping the lawn nice. And being a renter means I never have to worry about my house being an anchor – I can leave whenever I want. I find good deals on furniture at thrift stores that is either neglected and can be rescued, or I build my own – beds, couches, tables, shelves…etc out of cheap wood that may not be fancy, but is functional. And I drive cars that have lots of miles on them and aren’t flashy or nice, but I can do 90% of the work on them myself. In fact, I am nearing completion of a car I built from the ground up over the past four years.
It’s not easy – and there were times when my kids and I lived on instant ramen and hot dogs for a few days here and there – but if you stay disciplined, refuse to overextend, and fix your budget problems when they crop up, you will suddenly find yourself wondering why you ever chose to live any other way.
The bonus is that I can sleep better at night knowing that I’m no longer contributing to the phony debt-money scam being run by the banks and Fed. It isn’t much, but every little counts.
I’m there with you… I’ve started saving for a house downpayment during the last bubble, and now have cash to just buy one. I don’t know that I want one though… you certainly don’t make a good pitch for homeownership 🙂
Did get a nice bit of satisfaction for all my austerity a few months back though. Bought me a new Tesla with cash. Felt pretty baller handing the Tesla guy the check, until he asked for my phone to take a picture of me with my new car. The phone is decidedly not baller… 5 years old and with a busted up screen. He looked like he didn’t want to touch it, but gingerly took it and soldiered through the photo. Guess I’ll never rock it like a Kardashian.
If you’re anything like me – willing to pull up stakes at a moment’s notice for whatever reason in the world (easier now that my kids are grown) – owning a house is akin to owning an anchor unless you make enough money to pay the property taxes and for someone to keep it up in your absence, or you have enough trust in yourself to choose good renters. I don’t have either, LOL…
So I rent and let my corporate landlord worry about the expensive heavy lifting like my new hot water heater and new air conditioner last year. And the new roof it will need in another year or two if I am still here – which isn’t likely.
I am sort-of familiar with that second experience although I’ve never bought a Tesla. I do have an old-ass smart phone that everyone laughs at – but it does all the things I need it to do so I will (like my cars) drive it until the wheels fall off. And if I can’t do the necessary work to put them back, I will buy another.
I enjoy my life and the freedom that being debt-free gives me regardless of the fact that I may not own a house or ever have a new car or phone or whatever. Consequently, I will strive to ensure I never go into debt for anything again unless there is truly zero choice – and while I can’t currently imagine a scenario where that’s the case, I must admit that anything is possible.
Over my lifetime I could never EVER have saved enough to buy a huse with 20% down and you are implying I pay cash outright? I nearly bought a house from my Grandfater for slightly less than $11k when I was in the service but my monthly pay was only about $865 per month and it was 1,000 miles from my permanent base, I would have had to rent it to someone. We did not have computers and internet, property management companies were rare back then outside of really large cities. And I was getting out of the service in a year so no more stable income albeit so tiny I could not even qualify to buy an eleven thousand dollar house.
Unemployment in my home county was at about 33% in 1980 when I seperated and went on UI, which was a whopping $86 per week. After 6 months I got a CETA job paying $3.35 per hour, you remember CETA right? Carter’s jobs program.
My entire life I have never really even made it to middle class in spite of good IQ, better ethics (no criminal record for example) and a lot of hard work, but have worked at shit jobs with shit bosses, crooks, bigots that discriminated, liars, serial bankrupts, and even when I worked for the VA at the San Diego VA medical center in La Jolla as the ward clerk on the surgery floor I only took home about $598 every two weeks, that was 1991, I survived on Trader Joe’s 5 for a dollar avocados and had to walk to work from my share rental because I could not afford a bus pass.
Year in and year out that 20% of the price of a house in my home state rose faster than my pay ever could, so when I was hauling down a tremendous $16k per year in 1991 at the VA a 20% down payment alone would have been over $40,000, the median house price was $200,960 by 1991. It was very simply out of the question that I was ever going to be able to buy, it was questionable enough if I was going to eat on any given day.
That is just the way it is.
My best friend was an only child, father and mother stuck it out even if they might have wanted to divorce, he was a good provider she a stay at home mom. His dad died when he was relatively young and his mother by then had plenty to live on so she gave my friend the money he would need to buy a home with about 50% down. And when she died he paid it off, by then it was worth $950,000 just because it was in Santa Rosa Sonoma County on the edge of the best neighborhood.
There is all the difference in the world, his education and house paid for, he could indulge in most things I knew I would never have a chance at all because we do have STRUCTURAL inequality in this nation.