April 1 was a key milestone on everyone’s mind—the first date that many payments would be due in a COVID-19-weary world on lockdown. In the weeks leading up to that date, the Federal government negotiated, passed, and signed a monumental $2 trillion relief package. Some CEOs, like Wayne Kent Taylor of Texas Roadhouse, announced that they would slash or surrender their salaries so employees could continue to be paid. Many banks began formulating new policies and programs, including payment deferrals and less-expensive lines of credit for small businesses and consumers.
Many stakeholders who could started pitching in, hoping to provide an economic bridge to weather this crisis. Then came reality, as the government signaled a continuation of the lockdown for 30 more days. May is now another critical milestone in fiscal responsibilities that may be missed.
What will the lending industry do as this crisis continues?
When experts are asked to predict the economic impact of the coronavirus pandemic, they usually have a range of answers and scenarios. There is simply no way to predict anything accurately—other than there will most definitely be a huge financial fallout. One recent study, for example, ran more than 12,000 bank-held commercial loans through a worst-case-scenario algorithm. Factoring in a 35% plunge in CRE prices over the next two years, it predicts a dramatic increase in commercial defaults, up to 8% from 0.4%.
This study sees the hotel industry taking the most immediate hit, with a 35% cumulative default rate. This is followed by retail, with 16%. Office, multifamily, and industrial sectors would also see a loss but at a more measured pace.
The fear, of course, is that once borrowers begin missing payments, defaulting on loans, or permanently locking doors, the lending sector will be the next domino to fall.
If there can be any kind of silver lining in all of this, it’s that today’s crisis is not like 2008, when the financial sector was blamed for wrecking the economy while its recovery was made the responsibility of taxpayers. And it’s believed that banks will be able to weather short-term loan losses, although some lenders may become overwhelmed should the economic crisis linger.
Many analysts also think the current situation is an opportunity for the lending industry to step up—to prove that it is not abandoning communities, employees, or borrowers. Among the efforts already underway are donations to charitable organizations, “fee waivers; deferred payments for credit cards, auto loans and mortgages; loan modifications; low-rate and zero-rate loans and other accommodations.”
In addition, the initial $2 trillion stimulus package gave banks strategies to provide aid to businesses, including $350 billion in government-backed, low-cost or forgivable Small Business Administration (SBA) loans. This initial round of funding, however, has run out. As of this writing, the second wave of small-business-loan financing—about $370 billion—is set to be passed by Congress. Many analysts project that this money, too, will run out. And “first come, first served” is the order of the day for small businesses seeking these funds.
Like many business and government sectors, simultaneous conversations are occurring to address the possible long-range implications and how best to prepare for them. Among the items up for discussion are executive pay cuts, suspending dividend payouts, and examining how long financial institutions can delay job cuts and changes to their business models. It is, without a doubt, a very delicate balancing act, and each effort will have its own share of consequences.
Naturally—and this can’t be stressed enough—it is simply too early to make any concrete predictions. While Congress is about to pass a fourth stimulus package—and more legislation may be on the way— it’s the progression of COVID-19 and the timing of a vaccine that will ultimately determine the longer-term response of the Federal Reserve, the stock market, and the lending industry.
Lenders have implemented steps to help consumers through the COVID-19 maze, including identifying at-risk borrowers and geographies, clarifying approval criteria and new procedures, and developing programs to assist those impacted by the pandemic. And consumers also have an opportunity to be proactive. They should reach out to their lenders to learn precisely what options are available while clearly communicating the financial impact of the pandemic and economic shutdown.
Commercial real estate property owners should collaborate with lenders and explore ways to provide relief to hard-hit tenants. Business owners with a mortgage may be able to seek some accommodations that salvage cash flow in the short term, as well. In most cases, lenders have a vested interest in hammering out arrangements that keep borrowers solvent—and to stop the potential fall of financial dominoes that could wreck the economy.
At Morris Southeast Group, we are holding firm to the belief that we are all in this together. To that end, we are here for you. If you have questions, call us at 954.474.1776. You can also reach Ken Morris directly at 954.240.4400 or via email at firstname.lastname@example.org.