Auto loan market divides; have banks set aside enough for bad loans?

Receiving Wide Coverage

On second thought

Hotel operator Ashford Inc., “one of the biggest beneficiaries of the government’s small business lending program, said on Saturday that its companies will return at least $70 million in loans received through the Paycheck Protection Program.” The company, which applied for “$126 million in loans, had previously said it planned to keep the money it received.”

“Citing new guidelines from the Small Business Administration that restrict who can receive funding, the company said its firms will return the loans. The decision came after media outlets, including The New York Times, detailed how Ashford had benefited from a program intended to help small businesses.” That also “caught lawmaker attention. Senator Chuck Schumer, Democrat of New York and the minority leader, had asked for an investigation into the company’s loans.” New York Times, Washington Post

Wall Street Journal

Wider gap

“Auto lenders are offering loans for new and used cars that let borrowers delay making payments for up to four months and providing record amounts of financing at 0% interest rates, sometimes for loans as long as seven years. Those deals are going to consumers with ostensibly stable jobs and high credit scores. In contrast, many companies that make car loans to drivers with lower credit scores are raising credit-score and income requirements and requiring bigger down payments.”

“Auto-financing terms are one sign of how the coronavirus pandemic is widening the gap between credit haves and have-nots. Some consumers are awash in financing offers from businesses desperate for customers. Others are finding it harder to get loans just when they most need them.”

Enough on our plate

The Federal Reserve has scrapped plans to use the $600 billion Main Street Lending Program “to promote the use of its preferred replacement for the troubled London interbank offered rate. The Fed’s retreat, in the face of opposition from some of the country’s biggest banks, highlights the challenges of shifting debt markets to a new short-term, interest-rate benchmark.”

“Regulators globally are pushing to replace Libor, which fell into disrepute after a manipulation scandal, before the end of next year. But markets have been slow to embrace the Fed’s replacement choice, known as the secured overnight financing rate, or SOFR. Regulators now face more resistance from lenders who don’t want to add complexity to stimulus efforts in the midst of global economic upheaval.”

No sympathy

Laying off employees during the current economic crisis “has become reputationally risky” for British banks. Barclays has committed to no new job cuts until September, [while] HSBC put on ice a plan to cut 35,000 staff globally.” But “firing investment bankers—the villains of the previous crisis—doesn’t seem to be a problem.”

For example, when Royal Bank of Scotland reported first quarter earnings on Friday, it “confirmed plans to shrink its investment bank this year. The effort involved firing over 100 bankers via video. And the outcry, you ask? It couldn’t be heard over the hum of the dishwasher.”

Financial Times

Push and pull

U.S. mortgage rates hit an all-time low of 3.23% last week, “the lowest rate since Freddie Mac started tracking the data a half century ago,” yet they’re higher than they should be, especially when compared to the 10-year Treasury yield of 0.6%. “The gap between mortgages and the benchmark rate, at 2.6%, has only been wider during the financial crisis.”

What’s keeping rates so high relatively? High demand for refinances, which “allows lenders to pick and choose among applicants and charge premium rates. There is also uncertainty about whether borrowers will make their payments, given that the federal bailout law allows borrowers to take forbearance without penalty for up to 12 months.”

Sufficient cushion?

Banks in the U.S. and Europe “are on track to book more than $50 billion of charges on souring loans in the first quarter, the biggest such provisions since the 2008-09 financial crisis, and an indication of the severe economic damage wrought by coronavirus. U.S. banks have been the most cautious, boosting their reserves for potential bad loans by 350% to $25 billion, while European lenders have increased provisions by 269% to €16 billion.”

“The full extent will become clear over the course of the coming week, when banks including France’s BNP Paribas, Dutch lender ING and Italy’s UniCredit report their earnings.”

But will those reserves “be enough to protect the real economy and survive themselves? The danger is that large credit losses could prompt them to cut back their lending just when it is needed most.”

Not finished

Former ExxonMobil CEO Lee Raymond, “the most powerful force on the JPMorgan Chase board after Jamie Dimon,” is stepping down as the bank’s lead independent director, apparently succumbing to pressure from some investors and climate groups that he leave. “This is a tremendous victory for shareholders and for the planet,” said Scott Stringer, the New York City’s comptroller.”

But “climate change groups, including Majority Action and Stop the Money Pipeline Coalition,” say “their campaign is not over yet.” They want Raymond “removed from the board entirely.”

Washington Post

Rising tensions

The tension between “landlords and mortgage companies against homeowners and renters, with each side claiming it needs more assistance and fueling calls for billions in new aid for the housing sector, could explode this week as mortgage and rental payments come due for millions of Americans who have lost their jobs. Already, at least 3.8 million homeowners have sought mortgage relief and were not making their payments by the end of April. That number is likely to increase drastically this week as the country’s unemployment rate hits levels unseen since the Great Recession, lenders and housing advocates say.”

Quotable

“Whenever there is a downturn, that is the first bucket to go in terms of risk—the people that are barely qualifying.” — Jessica Caldwell, an executive director at Edmunds, commenting on news that auto lenders are making it harder for borrowers with weak credit to get loans.