A Banner Time to Borrow?

According to the Federal Reserve’s just completed stress test of banks — a process that began annually after the 2008 Great Recession — most banks are currently considered healthy enough to survive the pandemic.

But there’s a negative warning in that analysis. If the coronavirus ends up triggering the prolonged economic downturn many experts are predicting, the biggest banks could have to eat as much as $700 billion in losses from defaulted consumer loans including autos, boats and home mortgages, along with corporate debts and commercial real estate loans.

A report in the Wall Street Journal says that Americans have already skipped payments on more than 100 million student loans, auto loans and other debts (boats not mentioned) since the coronavirus hit. Specifically, the largest increase is 79 million student loans in deferment or other relief status totaling $1.5 trillion, dramatically up from 18 million loans a month earlier because of the CARES Act. Auto loans have also doubled to 7.3 million accounts in default and personal loans have climbed to 1.3 million accounts.

However, many are reportedly adding to their savings accounts at record levels, perhaps in an effort to weather the economic storm. The U.S. Bureau of Economic Analysis says the saving rate in April hit 33 percent, up from 12.7 percent in March. The previous record was 17.3% in 1975.

And while more money in the bank could mean more for a down payment on, say, a new boat, we must temper it all with the recognition that: unemployment payments and stimulus checks likely raised some incomes; household expenses may be temporarily reduced; and, many others have deferred mortgage payments, along with payments owed on other debts and credit cards.

All that notwithstanding, one thing is a pretty good bet -- interest rates will stay at rock bottom levels for some time to come, something that should help dealers’ debts and offer boat buyers’ attractive financing. To boot, there aren’t any signs of inflation, either.

Before the pandemic hit, full employment meant wages were expected to go higher as companies competed for workers amid the record employment. Climbing labor costs normally get passed along to customers and that drives inflation up. But that didn’t happen. Prices remained stable and inflation low. Right now, increases in either aren’t on the horizon.

In fact, with interest rates falling to the lowest level on record, this should be a banner time to borrow, first for households in search of a new mortgage and for big ticket purchases like boats. But it isn’t panning out that way.

Mortgage availability has reportedly tightened sharply as lenders impose tougher income, credit-score and down payment conditions, and even drop some attractive loan types altogether including home-equity lines of credit — frequently used to purchase boats.

The volume of mortgages being refinanced, which normally rises sharply when rates drop, is up only modestly since before the pandemic, according to Black Knight, a mortgage-data and technology firm.

The economic shock from COVID-19 can explain much of this growing credit crunch. Banks see rough waters ahead and are preparing the ship to ride out the storm. In addition, bankers say the economic factors are exacerbated by policy decisions in Washington. For example, as part of the CARES relief bill, Congress let homeowners suspend mortgage payments for up to a year. But, as Congress can often do, it provided no way to pay for this, sticking lenders with the liability.

As reported here in Trade Only Today on May 28, according to Jim Coburn, Coburn & Associates and secretary/treasurer of the Michigan Boating Industries Association: “Lenders are clearly altering and managing their underwriting guidelines. When the coronavirus hit, like everyone else, lenders were suddenly thrown into uncharted waters. They were rapidly facing waves of new requirements and demands coming from Congressional and regulatory actions.”

“So, they did what all well-managed businesses do,” Coburn continued, “they donned life jackets and prepared for probable rough sea ahead.” Good advice for every business.