Banks prepare for PPP 2.0 onslaught; mortgage lenders struggle with demand

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Round two of the Small Business Administration’s Paycheck Protection Program kicks off Monday morning at 10:30, likely “setting off a frenzy among lenders and small businesses to scoop up the funds,” the Washington Post reports. “The original program was marred by numerous glitches among lenders, many of which were not ready to accept applications when the program launched, and repeated reports that the SBA’s computer systems were struggling under the deluge.”

“This time, lenders say they have thousands of applications ready, and some have developed new technology to make it easier to load loan applications into the SBA’s computer systems, in hopes of gaining an advantage. JPMorgan Chase and Bank of America, two of the country’s largest banks, said they have tens of thousands of applications prepared. Some bank executives say they are preparing for the money to run out within 48 hours and are planning to stay up all night once the SBA begins taking applications again.” Washington Post, American Banker

The New York Times looks at the chaotic first round of the program, which “distributed $349 billion in less than two weeks, but lenders and borrowers confronted confusion at every step.”

“Companies with accounting problems or in trouble with the government received millions in federal loans,” the Times said.

While at least 13 public companies, including several restaurant chains, “have said they will return funds they received under the program amid mounting criticism of big public firms that received funds,” several lodging companies affiliated with Dallas businessman Monty Bennett “that combined have received more than $68 million … say they are keeping the money, despite the government’s call for large public companies to return these funds,” the Wall Street Journal reported.

“We plan to keep all funds received under the [PPP],” the three hotel companies said in a statement on Saturday. “Ashford Hospitality Trust and Braemar own 130 hotels valued at billions of dollars, but their share prices have plummeted, and Ashford Hospitality Trust now trades at less than one dollar. Mr. Bennett said in March that the companies laid off or furloughed 95% of staff and Ashford Hospitality Trust has stopped making payments on billions in mortgages.”

AutoNation said it “received more than $77 million in federal small-business funds despite being a company worth billions that employed more than 26,000 people before the pandemic,” the Washington Post reports. But the car dealership firm’s board voted last Thursday “to return the funds even though the company had acquired them under the rules created by Congress and intended to use the money only to pay employees.”

Presumptive Democratic presidential nominee Joe Biden criticized banks for lending PPP money to big companies. “We knew from the beginning that the big banks don’t like lending to small businesses,” Biden told Politico. “I’m telling you, though, if Main Street businesses don’t get help, they’re gone.”

Bloomberg News

“This is the second time we’ve bailed their asses out,” he said of the big banks, adding that banks like Wells Fargo are “only alive because of the American taxpayer.”

Banks to the rescue?

Banks today “are not the cause of the economic crisis. But nor are they the solution,” the Journal reports. “Changes to the nation’s financial system, put in place after the 2008 crash to prevent a repeat, have sapped banks’ tolerance for the kinds of risks that are necessary to bring about a recovery, according to regulators, experts and bank executives themselves.”

“The changes in regulations and market infrastructure that made banks safer than they were in 2008 also made them less effective at their basic job: moving money from those who have it to those who need it, which could be a drag on the nation’s financial recovery.”

Europe has an even worse problem. “Worries are mounting about the ability of Europe’s financial system, in particular its fragile banks, to make it through the coronavirus crisis unscathed.”

Deutsche Bank, which pre-released its first quarter earnings on Sunday night, said it is reducing its capital levels in order to “support clients and the broader economy in times of crisis.” Net after tax-income came in at €66 million, down from €201 million in the year earlier period. Financaitl Times, Wall Street Journal

In the U.K., the Bank of England has “warned lenders against booking huge charges on souring loans amid fears it would curb their ability to support struggling companies. Representatives from the BoE’s Prudential Regulation Authority have spoken with top banking executives over the past week to advise them not to ‘kitchen sink’ provisions in the first quarter of the year,” the Financial Times said.

“Banks including Barclays, HSBC, Lloyds and RBS report their first-quarter results over the next two weeks. If their loan-loss provisions were to increase in line with their U.S. peers, they would suffer a sharp hit to profits, while Barclays would be likely to fall to a loss. More important from the regulator’s perspective is that such conservative planning for defaults would hit capital levels, reducing banks’ ability to write new loans at a time when companies desperately need credit.”

Loan-loss provisions “will take center stage when British and European banks start reporting first-quarter results this week,” the FT says. “Investors are expecting these charges to surge to, and even beyond, levels not seen since the financial crisis, piling pressure on lenders’ already fragile business models. Analysts estimated loan-loss provisions could quadruple or more in the first three months of the year, while bank profits could fall 50% on average over the whole of 2020. Ominously, they warned that the worst was yet to come.”

Wall Street Journal

Day of reckoning

“Banks and other lenders that for years relied on heavy consumer spending to create big profits are preparing to struggle alongside their customers” as “millions of Americans are skipping their credit-card payments as the coronavirus pandemic puts them out of work,” the Journal reports. “Those suspensions will allow some borrowers to stay afloat, but only temporarily. Companies and analysts expect delinquencies and charge-offs to soar later this year. Banks and other lenders can only shoulder the unpaid loans for so long before they face a reckoning too.”

Financial Times

Refi boom

But business is booming in the mortgage origination business, where “lenders are struggling to keep up with a tidal wave of refinancing demand, adding staff to cut through the massive backlog of applications and cutting back on marketing to slow the stream of incoming business,” the FT reports. “Since last month, when the Federal Reserve slashed interest rates, the number of homeowners looking to lower their mortgage payment has soared — to at least four times as many as a year earlier.”

“We have the largest refi pipelines we have ever seen” said Eric Schuppenhauer, president of consumer lending at Citizens Bank.

Quotable

“My biggest concern is SBA not being able to handle the amount of loans trying to be processed and American small businesses becoming frustrated even more than they are today.” — Richard Hunt, president of the Consumer Bankers Association, anticipating round two of the Paycheck Protection Program.