From the oil patch to vacation destinations and the coastal economies that house much of the American population, the fallout from the coronavirus pandemic is spreading.
A stunning 5.2 million Americans filed for unemployment in the week ending April 11, leading to a total of 22 million job losses over the past month. As unemployment rises, lenders like JPMorgan JPM and Bank of America are setting aside record amounts to cover coming losses from Americans unable to pay their credit cards, auto loans and home mortgages.
But according to data provided by New York City fintech Dv01, loan delinquencies are already a serious matter for online lenders.
Consumer Loan Impairments Hit 12%, Doubling In Weeks
After the coronavirus hit, late payments to online lenders doubled from March 18 to April 9, an unprecedented spike in loan trouble that shows little sign of abating.
As of April 9, some 12% of consumer loans made by online lenders are already “impaired.” That means the borrower has skipped a payment either by negotiating a due-date extension with a lender or simply by not paying. It’s a near-doubling of troubled loans in three weeks, according to data that tracks 1.7 million loans worth $19 billion provided by Dv01, which happens to be named after a formula that traders use to calculate their exposure to interest rate changes. The startup, more broadly, tracks 32 million loans with a combined notional value of $3 trillion.
In its annual stress tests, the Federal Reserve models credit card loss rates for large banks to be 11.3% in an “adverse scenario” and 16.35% in a “severely adverse” scenario. Dv01’s new findings mean that at least among online lenders, credit issues have already spiraled beyond a bad recession and are heading towards Depression-like levels.
Trouble Hits Coastal Financial Centers, Tourism Economies And The Oil Patch
Some of the most important economic regions of the country are being hit hardest by COVID-19. Loan difficulties increased the most in California, New York, tourism-centric states like Hawaii and Nevada and oil states.
The picture is notably worse among certain groups. In the tourism-dependent states of Nevada and Hawaii, loan impairments reached 16%. Among borrowers with pristine FICO credit scores above 740, impairment rates have tripled to 7.5%. For borrowers with below-average credit scores below 650, they’ve reached nearly 20%.
Impaired Loans Triple For Highest Credit Scores, Surge To Almost 20% For Risky Borrowers
Financial trouble hits borrowers across the credit spectrum. Late payments triple for those with FICO scores above 740 and reach nearly 20% for near-prime borrowers.
According to Dv01’s data, three-quarters of the surging impairments are due to lenders modifying a loan to give borrowers more time to pay.
“It is alarming, and we’re going to see more of it, and across every consumer loan class,” says William Ryan, a managing director at investment bank Compass Point, of the 12% impairment rate. “In my 30 years of doing this, I’ve never seen payments impairments spike so quickly.” For historical context, Alliance Data Systems ADS , which makes private label credit cards for companies like Sony and Caesars Entertainment CZR , saw a 12% delinquency rate on $3.4 billion in loans during the financial crisis, Ryan notes.
Dv01’s data tracks loans made by online platforms like LendingClub, SoFi, Best Egg and Prosper Marketplace. The average FICO score of the loans it tracked was 715 and the average loan balance was $11,400. While large and comprehensive, the data set covers just a fraction of America’s record $14 trillion in household debt, including $4 trillion-plus in credit card debt. But the shock to consumer loans from the pandemic’s force is in no way limited to online lenders.
On Tuesday, JPMorgan, America’s largest bank by assets, booked a $6.8 billion credit reserve to prepare for loan defaults, which wiped out most of its first quarter earnings. Add to that credit reserves set aside by Bank of America BAC , Citigroup C and Wells Fargo, and the total amounts to roughly $20 billion. JPMorgan chief financial officer Jennifer Piepszak said on a call with reporters this week that provisions could be “meaningfully higher in the next quarter.”
As for traditional credit card lenders, Capital One and Discover reported no meaningful increase in delinquent card payments in March. Still, analyst Bill Carcache of Nomura Instinet estimates COVID-19 write-offs to peak at between 5% and 7% of their total card portfolios, noting that at its worst in 2008, defaults remained below 10%. Both lenders will report earnings—and new provisions—next week.
To help borrowers slow an uptick in past-due loans, online lenders have been rushing to adjust loan due dates. LendingClub, the San Francisco company that helped pioneer online lending in 2006 and originated $12 billion in loans last year, emailed all its customers and is giving them a two-month extension if they log into their account and make a half-dozen clicks. Upstart, an eight-year-old Silicon Valley lender, is giving people two extra months to pay. Installment loan provider Affirm is changing loan due dates on a case-by-case basis, says a person familiar with the matter.
To defend against an expected increase in customer defaults and losses, LendingClub has also stopped making loans to its “Grade D” or least credit-worthy borrowers.
Dv01 CEO Perry Rahbar and principal analyst Vadim Verkhoglyad say it’s important to compare the 12% impairment level to the number of unemployment claims, and they don’t see the situation as dire yet. “Among the biggest criticisms of marketplace loans is that these loans may substantially under-perform during an economic downturn and default multiple times the change in unemployment rate,” they wrote in a summary report. “To date, however, the trends show that the rate of impairment has been below the overall unemployment change, which is a very positive sign for investors.”
The government’s economic stimulus measures, including the $1,200 stimulus checks, will help troubled consumers. “The average person on unemployment in the U.S. should be making the equivalent of a $55,000 annual salary for eight weeks,” says Giuliano Bologna, an analyst at investment bank BTIG. “That’s a pretty good safety net for a lot of people.” Some of the personal loans made by LendingClub and its peers are used for business purposes, and those borrowers can get access to emergency loans from the government through the newly passed Payment Protection Program, Compass Point’s William Ryan adds.
But there’s enormous uncertainty around when the economy will recover. Even if social distancing guidelines start to lift in May, consumers won’t immediately begin flying on airplanes, staying in hotels and eating at crowded restaurants. One lender Ryan has spoken with said he’s “grasping at straws” trying to predict the recession’s impact on earnings. If unemployment reaches the 20% or 30% level that some experts predict, loan delinquencies could break new records. The last time unemployment hit 25% was during the Great Depression, in 1933.
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