CUNA News
  • LOG IN
  • Create Account
  • Sign Out
  • My Account
  • LOG IN
  • Create Account
  • Sign Out
  • My Account
  • Credit Union Magazine
    • Buyers' Guide
    • COVID-19
    • Digital Edition
    • Credit Union Hero
    • Credit Union Rock Star
    • Subscribe
    • Advertise
    • Contact
  • Advertise
  • Topics
    • Community Service
    • Compliance
    • Credit Union Hero
    • Credit Union Rock Star
    • Credit Union System
    • Directors
    • Human Resources
    • Leadership
    • Lending
    • Marketing
    • Operations
    • Policy & Issues
    • Sales & Service
    • Technology
  • Awards
    • Nominate Credit Union Hero
    • Nominate Credit Union Rock Star
  • Podcasts
  • Videos
  • Contact

News

Home » SPONSORED BY Moody's Analytics
Sponsored Content
Sponsored Content
Description+goes+here

Unmasking hidden stress in consumer and CRE credit

Understand pandemic effects to learn what to monitor moving forward.

November 16, 2020
James Partridge
No Comments
Unmasking hidden stress in consumer and CRE credit

As we enter a new phase of the pandemic recession and clarify some of the uncertainty surrounding the economic impact, one lingering mystery is the extent to which borrower assistance, such as forbearance and deferment, has masked stress in consumer and commercial credit. We have seen only a slight increase in consumer lending and commercial real estate (CRE) delinquency rates, so the potential onslaught of losses might be an exaggeration.

Both CRE and consumer credit were solid heading into the pandemic, so we can focus on the stress that the pandemic itself caused. This unique recession has produced widespread business closures and far less travel due to lockdown measures. Sectors affected by lockdowns have been hurt most: brick-and-mortar retail, hotels, and restaurants. Generally, they employ workers at low wages (who often have lower credit scores)—so subprime borrowers have been hit hardest.

Content Sponsored By:

Moody's Analytics

Accommodations

Accommodations grew for all consumer asset types, peaking in either May or June, and have been declining ever since. Accommodations have helped subprime borrowers most, as they show the largest decline in default rates relative to last year, using CreditForecast.com (a consumer credit database Moody’s Analytics produces jointly with Equifax). Thus, one might expect that delinquencies have also begun to pick up as a first step to an eventual increase in defaults. Initially, this has not occurred, as in many cases they are below their values from a year ago.

However, looking at weekly delinquencies shows a few weak spots. Whereas total delinquencies have remained flat since bottoming out last summer across all credit scores, weekly delinquencies in credit cards for deep subprime borrowers are increasing, gaining about a percentage point through the end of October. Supporting the earlier point that these are usually low-income borrowers, this trend is also evident in borrowers with household income at origination of less than $40,000 and disappears as we move to the highest-income groups.

Stress might also be hidden in CRE, where banks continue to report low delinquency rates despite an increase in nonperforming loans since the beginning of 2020. In contrast, commercial mortgage-backed security (CMBS) delinquency rates have spiked, reflecting that CMBS lenders have less flexibility in providing forbearance and loan modifications. CMBS delinquencies increased most for hotel and retail property types, whereas others show small increases, if any. Hotel loans also show the highest modification rate, at about 9%, and the modification rate for retail loans doubled from 2% in June to 4% in July.

Parting thoughts

Though other weak spots may emerge, to date there is evidence of weakness in subprime, consumer credit card debt, and retail and hotel debt for CRE. Recently, the shape of the recovery for the broader economy shifted from V, to W, and now to K (where different parts of the economy recover at different rates). With strong performance in most areas, is this the way we should think about future consumer and CRE debt?

Hence, combing through all available information and focusing on the most relevant becomes especially valuable. Given its strong performance to date and outlook over the next 6 to 12 months, it will be less important to monitor factors that affect retail mortgage, such as house prices, than to monitor those that more acutely affect unsecured borrowing for low-income households, such as interest rates and income (including government transfers). Similarly, foot traffic in downtown areas and travel patterns will become more important to the health of the CRE book.

JAMES PARTRIDGE is a director of credit analytics at Moody’s Analytics.

KEYWORDS coronavirus credit delinquency

Post a comment to this article

Report Abusive Comment

Credit Union Magazine: Spring 2023

Spring 2023

Credit Union Magazine’s Spring 2023 issue features the 2023 Credit Union Heroes and examines CUNA-League advocacy priorities, board leadership, the impact of financial well-being efforts, fee-related compliance issues, predictions for the year ahead, and more.
Digital Edition •  Subscribe

Trending

  • CUNA Mascot Madness: Voting opens for East Region

  • Mascot Madness: East winner crowned; Midwest voting opens

  • League leaders highlight credit union difference, safety, soundness

Tweets by CUNA_News

Polls

CUNA Mascot Madness: Which West Region mascot is your favorite?

View Results
More

Champion for the Credit Union Movement

Credit Union National Association is the most influential financial services trade association and the only national association that advocates on behalf of all of America's credit unions. We work tirelessly to protect your best interests in Washington and all 50 states. We fuel your professional growth at every level and champion the credit union story at every turn.

More CUNA

  • Membership
  • Contact Us
  • Careers

Resources for

  • Credit Union Advocates
  • Leagues
  • Press
  • Providers

Our Affiliates

  • American Association of Credit Union Leagues (AACUL)
  • Credit Union Awareness
  • Credit Union House
  • CUNA Strategic Services
  • National Credit Union Foundation
GET CUNA UPDATES
© 2023 Credit Union National Association | ADA Compliance Notice & Legal
Email Us