”Banks don’t know who is going to pay”
As the saying goes, “bad data is worse than no data” and this is perhaps especially true if you are a bank attempting to assess who is creditworthy. As AnnaMaria Andriotis of the Wall Street Journal explains (alternative link), thanks to provisions in the CARES Act that bar reporting deferred payments as late, banks are facing a “credit blind spot” trying to discern “if a borrower in deferment has fallen on tough times is simply taking advantage of lenders’ relief options”. As Michael Abbott of Accenture PLC is quoted, “Without accurate information, their only option is to pull back on credit”. This pull back has been reflected in a variety of data including falling loan origination, declining credit card originations, and “tightened lending standards for all consumer loan categories” tracked in the Fed’s Senior Loan Officer Opinion Survey. This could be a problem for the housing market, as low rates won’t help borrowers if mortgage credit availability continues to sit at exceedingly low levels. However, banks aren’t sitting idly by and are “looking for data that will help them figure which applicants are safe bets”, including cellphone records and benefit deposit data. This is similar to what Experian’s Boost feature is based on, but while it may be a useful tool for banks to assess a borrowers risk, all that data and metadata floating around carries its own risks (I II).
Finding “Equitable Solutions”
At the same time that the consumer credit market is being shaken up, Commercial Real Estate is facing its own turbulence. As an article from the New York Times explains, landlords and tenants are actively trying to navigate a shifting landscape where strong companies are trying to get better deals, while building owners themselves “are trying to hold the line on rents for fear that rising vacancies and falling revenue could threaten their own survival”. In addition to retail problems, as the S&P covers, CV19 appears to be accelerating structural changes in office real estate, with companies like Square announcing that they will continue to allow employees to work from home even after shelter-in-place rules have been lifted. There is hope that excess space can be repurposed, as Bloomberg’s CityLab explains in this article on converting malls into residential and mixed-use facilities. However, even the BIS highlights the pain seen across CRE in its Annual Economic Report, pointing out that “Investors anticipate large CRE price declines”.
P.S. While the main text of the BIS’s Annual Report borders on saccharine, it has inserts on topics we’ve been following, including Treasury Market dislocations and “Monetary financing”.
