Lenders tighten underwriting standards; coronavirus death on Wall Street

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Virus victim

Jefferies CFO Peg Broadbent “has become the first senior Wall Street figure known to have died from coronavirus complications,” the Financial Times reports. The New York-based investment bank said he would be replaced on an interim basis by Teri Gendron, the CFO of Jefferies Financial Group, the parent company. Wall Street Journal, Financial Times

coronavirus

Help for servicers

Ginnie Mae, which guarantees payments on $2 trillion of mortgage-backed securities, “is activating a program typically used after natural disasters to help liquidity-starved mortgage servicers upended by the coronavirus outbreak. Ginnie Mae said it would cover the difference between what servicers owe and the funds they have on hand, although the agency stressed that the program was temporary and should only be used as a last resort. Tapping into this program would typically trigger a technical default, but that provision is being waived due to the scale of the coronavirus emergency, Ginnie Mae said.”

Borrowers have been “flooding the phone lines of their mortgage servicers” looking for help, American Banker reports.

“Many of the country’s largest mortgage lenders are warning they will be soon pushed to the brink of failure with millions of Americans laid off due to the coronavirus outbreak likely to miss their next loan payment, threatening to disrupt the housing market in a way not seen since the Great Recession,” the Washington Post says.

Wall Street Journal

Getting stricter

“Banks and financial-technology firms are starting to toughen their approval standards for new loans to consumers and small businesses,” the paper reports. “That means many people could find it hard to get credit just when they most need it, as the novel coronavirus pandemic puts thousands out of work.”

“Lenders are concerned that rising unemployment and a potential recession will send loan defaults soaring. The moves suggest at best a pause and at worst an end to six-plus years of a bull run in credit, where financial firms have been eager to lend and underwriting standards for credit cards, auto loans and personal loans have been relatively loose. Many lenders have said they would work with existing borrowers who ask for help. But lenders are reluctant to take on additional risk from new customers.”

Economic doctors

The coronavirus rescue legislation signed into law by President Trump last week includes $454 billion to “reload” the Federal Reserve’s ability to lend and “charge headlong into credit and fiscal policy by financing businesses, states and cities, areas the central bank has normally regarded as matters best left to elected officials in Congress and the White House. Washington is relying on the Fed, to an unprecedented degree in peacetime, to preserve business balance sheets after elected officials and private industry have put the economy into the equivalent of a medically induced coma to stop the spread of the coronavirus pandemic,” the paper says.

“The Fed has essentially unlimited power to lend during a crisis as long as officials consider their loans well-secured. By providing the Treasury Department with a sizable pot of money, Congress has given the central bank more flexibility to ramp up lending because the Treasury will agree to absorb initial losses.”

Balancing act

The coronavirus “poses a new challenge for small banks across the country. Most of America’s banks are woven into the local economy and a key source of credit for small businesses. As the downturn squeezes more industries, community banks must balance helping these businesses with protecting their own bottom lines.”

Financial Times

Putting it off

Europe’s financial regulation chief “pledged todelay tough new capital rules for banks, saying that support for lending has to be the overwhelming priority in the fight against coronavirus.” Valdis Dombrovskis, the European Commission’s executive vice president in charge of economic and financial policy, told the paper “now was not the time to push ahead with standards that would force banks to raise additional equity. He applauded moves by global regulators on Friday to defer the rollout of new capital standards by one year, confirming Brussels would make sure European banks could benefit.”

On Friday the European Central Bank “ordered eurozone banks to freeze dividend payments and share buybacks” until at least Oct. 1 “in an escalation of its efforts to avoid coronavirus triggering a credit crunch in Europe. The move is expected to result in many of the region’s largest banks either canceling or delaying plans to return billions of euros of excess capital to investors.”

The freeze is intended to “boost banks’ capacity to absorb losses and support lending to households, small businesses and corporates,” the ECB said.

Deferred payments

U.K. banks have asked the Financial Conduct Authority to let them extend a three-month payment “holiday” to their credit card customers to help them cope with the coronavirus crisis.

“Credit card issuers could still charge interest and fees during any such payment holiday and the total debt would ultimately still have to be repaid,” the paper says. “But they have said they will not treat anyone as having missed payments, to ensure customer credit ratings are not affected.”

Elsewhere

Depositing

“Deposits are pouring in at the largest U.S. lenders as consumers and corporate clients seek shelter from the economic toll of the coronavirus pandemic,” Bloomberg reports. Deposits have risen this year by 5.3% through March 18, “more than triple the increase from a year earlier,” according to Fed data. “Driving the gains are the 25 largest banks, which have gained $500 billion in deposits since year-end.”

“Goliath is winning when it comes to a potential crisis such as this because there’s a flight to quality,” Wells Fargo bank analyst Mike Mayo told Bloomberg. “Whether you believe the label ‘too big to fail’ or not, it sure doesn’t hurt to attract deposits in an environment like this.”

Quotable

“Lenders have zero idea how to assess risk in this environment. There is no model that can predict today if I lend $1, will I get paid back?” — Jared Hecht, CEO of Fundera, an online marketplace for small business loans

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