Unmasking hidden stress in consumer and CRE credit

Unmasking hidden stress in consumer and CRE credit

Understand pandemic effects to learn what to monitor moving forward.

November 16, 2020

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.


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 (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.