May Market Pulse: You Ask, We Answer
May 2020 Market Pulse Series – FAQs
Equifax and our expert guest speakers answered dozens of questions from attendees following our Market Pulse webinar series in May.
Guest speakers and Equifax subject matter experts included: Amy Crews Cutts, Jonathan Smoke, Laura Zeimer, Ethan Dornhelm, Jennifer Cox, Todd Hoover, Tom Aliff and John Fenstermaker. If you have a question, please follow up with your Equifax account representative or email us. Note: All views expressed by guest speakers are the views of that speaker and not necessarily the views of Equifax.
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Question: If the model uses trended data such as VantageScore 4.0, will there be a greater impact?
John Fenstermaker: We have yet to study the impact on trended attributes or scores that include trended attributes, but I suspect that impacts will be larger than on point in time attributes and scores.
Question: How long will the score lose some of its predictive power after the end of COVID-19?
John Fenstermaker: While the credit file will have a “blind spot” until the accommodation period rolls off of the credit file, I believe that as consumers come out of accommodation, we will learn whether or not they have the capacity to make payments in a matter of 1-3 months. So, I suspect that scores will recapture performance fairly quickly after accommodation ends.
Question: How often and how is it recommended to verify income and employment?
John Fenstermaker: Given how quickly the world is changing, I would recommend verifying every month because consumers are losing jobs and being furloughed at a high rate today, and as the recovery begins, furloughs will be reduced and unemployed consumers will be getting new jobs.
Question: Do you think the severe shock on the economy and the market will penetrate to cause fundamental damage as the time gets longer?
Amy Crews Cutts: Yes, without a doubt. It is a driver of governors wanting to do partial reopens now. However, the pandemic damage is also great if opening happens too fast or without adequate precautions.
Question: What do you think will be the long-term impact given that after this pandemic, the indebtedness across almost every aspect of society (personal, company, government, nation…), will be much higher?
Amy Crews Cutts: I believe that we will see households come out okay, better than in the Great Recession, but because we have done more to support them than in the Great Recession. We will see many small and medium sized businesses struggle and I am sure many will go under – this will have lingering effects that last longer than household stress. Corporate debt will be handled by the financial markets, but it is likely that commercial real estate will see a long slump due to retail and restaurant closures. Lastly on the government side, if we don’t impose austerity too quickly, the actions to shore up the economy will be spread over time. Furthermore, I believe at the low interest rates that much of this debt will be issued at will make the impact lower than the headline numbers might be. Inflation is not a concern among most economists as the drop in demand is so large that deflationary risks are more top of mind.
Question: Lenders are having to set aside huge dollars for loan loss reserves when what we are seeing is very little rise in delinquencies yet; this may be due to deferrals in place for bankcards for example? Yet last week you showed bankcards at about <1% were in deferral; so now this is close to 3% of accounts?
Amy Crews Cutts: The data is messy and the Equifax Data and Analytics Team is working hard to set a standard for calculating accounts with forbearance or other accommodations. One issue is that the CARES Act did not mandate a new narrative code with the reporting requirements, but allows several reporting formats. Some servicers have delayed reporting or have suppressed come statuses while they work on their systems to get these reporting requirements incorporated. For example, mortgages normally get a delinquent status if in forbearance, and under CARES Act they are to be marked current if they were current at the time of the accommodation.
So the differences week to week will be messy for the early weeks, getting into new normal soon. I would pay more attention to the changes in the numbers from the start of March rather than the absolute level for COVID-19 accommodation effects, with the levels then being gross of previous accommodations and new ones. For example, in home equity loans they often have a deferred interest period (if for example it was financing for a new roof) that is forgiven if paid in full before the relevant date. That would be marked as an accommodation, but is not due to COVID-19 impacts.
Question: Do you see greater shifts in subprime than prime customers?
Amy Crews Cutts: We are seeing significant shifts in new originations towards credit scores above 620, especially in April and May. This information is in the weekly Credit Trends Reports. The cause is likely due to many reasons. One is that some lenders that focus on this segment using money from the asset-backed securitization market have seen their funding dry up in the last few weeks. Hopefully, that market will open up again soon and provide support to these lenders so they can support consumers. Banks may be cutting back defensively for now, having a robust respect for credit risk after the Great Recession. We will look at performance by segments in upcoming webinars.
Question: For the HELOCs on the book, normally banks do not request income verification. Is there any way to verify the income for loans in book?
Amy Crews Cutts: Lenders can do portfolio reviews using income information using The Work Number® from Equifax similar to how they do credit updates to evaluate evolving risks in their portfolios.
Question: How does Equifax define a Prime vs. Subprime borrower?
Amy Crews Cutts: For these reports, Equifax uses credit scores below 620 to mark subprime accounts. This is just a standard that has been adopted for consistency across the Credit Trends Reports. Other breakpoints are used for more in depth analysis for specialized studies. There are also more break points in the Credit Trends Originations Reports.
Question: What is considered a Possible Accommodation? Delinquent? In Forbearance?
Amy Crews Cutts: Forbearance is included as well as deferrals and reporting according to the CARES Act guidelines on consumer accounts affected and reported due to hardship. The April 8, 2020 Equifax Market Pulse webinar covered the reporting of COVID19 Accommodations under the CARES Act.
Question: What are alternatives for future operation of now bankrupt major department stores?
Amy Crews Cutts: This has been a question independent of the current pandemic environment. Online orders have jumped due to stay-at-home orders and mandated store closures. This is only exacerbating an already weak brick-and-mortar retail situation. I don’t have any special insight into this, and worry that people who are in that line of business have also failed to see a viable answer, as we witness more and more retailers closing stores or declaring bankruptcy over the past several years.
Question: How will marketers adjust their audience development to deal with the rapid changes in consumers finances given market flux and potential income changes?
Todd Hoover: Initially, financial service marketers are leaning into cross-sell, prioritizing the deepest offers for their most creditworthy consumers. Moving into May and June, pre-screen and predictive modeling across channels with personalized marketing will take on increased significance. We also expect to see financial services marketers prioritize certain categories above others.
Question: Do we have any view into what portion of the unemployment population may not return because the total income from unemployment + CARES is more than they made when they were employed.
Amy Crews Cutts: The CARES Act expires soon, so that extra benefit, unless renewed, will remove the incentive to stay out of the market. Moreover, the point of the additional benefit was to ensure that workers would stay home if laid off so they would be incented to comply with the stay-at-home orders put in place by states. Economic research has shown that when unemployment benefits are too low, there is an influx of people into disability who never return to the workforce. The benefits in the CARES Act were deliberate in the amount to provide an economic cushion for laid-off workers. Lastly, one requirement of unemployment insurance is that you must take a job if it is offered or if you are recalled. These generous benefits end as soon as that return-to-work offer is made.
Question: How do you define possible accommodations?
Jennifer Cox: Please see our webinar from April 8. We are using the recommended reporting codes to identify possible accommodations. Unfortunately, with the CARES Act changes to the FCRA they did not also assign a new code to identify accommodations under the Act. So we are left to infer the counts from the combination of the codes as discussed in the April 8 webinar.
Question: For bankcard accounts that have requested accommodation, or deferral of payments, does the issuer then freeze their balance i.e., do they still allow future charges? It seems that since utilization is going up that this may be due to more spending?
Amy Crews Cutts: At the moment we don’t have this view into the details. But will add it to the list to see what’s happening at the card level.
Question: Could the drop in delinquency rates for subprime bankcards that you reported be due to accommodation?
Jennifer Cox: Yes, the drop in delinquency rates for subprime bankcards is impacted by accommodation reporting AND consumer behavior in paying down debt due to: reduced discretionary spend, belt tightening in preparation for months ahead and impact of government stimulus from CARES ACT.
Question: Do we see any significant changes in the approach to marketing used by companies in the telecommunications and retail sectors?
Laura Ziemer: Telecoms companies have placed increased emphasis on their B2B products and connectivity, as well as contact-free servicing. Telecoms volumes are up 10% as of the end of April. Retailers have shifted emphasis to delivery and online shopping. Marketing volumes are inconsistent depending on whether the retailer is still open (Target, Walmart) vs. closed (boutiques, specialty stores).
Question: How could the gender gap in unemployment data that Amy Crews shared earlier impact marketing plans?
Laura Ziemer: Fair lending in marketing may limit the impacts on targeting strategy; however, we do see brands marketing their support of female-owned small businesses as a reason to bank or invest. Brands like Ellevest allow consumers to invest in ETFs that only support female-owned small businesses, for example.
Question: Are financial institutions looking to make investments in Digital CX and MMM solutions?
Todd Hoover: No material increase has been seen. Most of these solutions are longer term investments.
Question: Thank you for the unemployment updates. In your opinion, what key indicators should we focus on as the economy looks toward a recovery?
Amy Crews Cutts: I would look to two things. One is retail sales, as states start to relax stay-at-home restrictions and allow gradual reopening of businesses. The second is hiring. Will those now open businesses begin taking back their furloughed workers?
Question: Will we see a ‘ V ‘ recovery in unemployment? Or will the path be bumpy as people return to work?
Amy Crews Cutts: Your question mentions employment, but that is part of the overall recovery. So, I will focus more generally. There is significant discussion on this among economists; the W is the worst outcome, implying a bounce from the bottom and then another deeper leg down. I am thinking it will resemble Nike swoosh shape generally, but the recovery will not be smooth, and it will be long. This is predicated on the Fed continuing to support financial markets, as Chairman Powell has indicated they will, and the Congress passing more fiscal responses to shorten the duration and depth of the economic pain.
Question: I’m not sure I understand the distinction between inferred and deferred. Both report as no payments due, correct?
Tom Aliff: Inferred does not have other codes attached to the account as being deferred formally. The “inferred” category was reported as no payment due with a balance on the account.
Question: What’s the second factor for drop in delinquency? One is the accommodations, and I missed the second one.
Amy Crews Cutts: Borrowers are putting more effort into paying down account balances.
Question: Are you seeing an increase in ITA mailings for lending products compared to previous ratios to pre-screen?
Todd Hoover: This data will be available May 20 for April.
Question: How do you reconcile reports from other sources (surveys, etc.) on the number of mortgage accommodations with your data? Are you seeing a surge in delinquencies as reported today in USA Today?
Amy Crews Cutts: The accommodations (i.e. forbearances and other payment accommodations under the CARES Act) that we report are from data supplied by servicers in the METRO II reporting formats recommended by Equifax and the Consumer Data Industry Association using the fields from consumer credit files. Other sources use surveys or rely on a subset of all servicers participating in a particular data collective which may represent accommodations granted but not yet reported to Equifax. Compliance with the CARES Act reporting guidelines does require some reconfiguring of reporting which may delay some reporting of accommodations to us, but this should be resolved soon.
Additionally, some reports add accommodations to delinquency rates. At this time we believe it is important to separate the reporting of these two metrics to paint an accurate picture of the COVID-19 impact and consumer financial standing. Also, the CARES Act specifically amended the Fair Credit Reporting Act to ensure that the reporting of forbearances and other accommodations would not be negatively reported to credit bureaus. There will likely still be some negative ramifications, however, as borrowers may be ineligible for a conventional, conforming loan refinance of their mortgage if they have entered an accommodation agreement.
Question: On bank deposits, does the slide take into account the 2008 dollars in terms of 2020 dollars?
Amy Crews Cutts: No, it’s in nominal dollars. The percentage change would remove the inflation issue for the short windows I looked at.
Question: Do we believe that since forbearances are so easy to obtain this time that people are being set up for significant payment shocks once they are out of forbearance? How should banks and CUs assess the potential shock in payments, and how should we prepare?
Amy Crews Cutts: For mortgages, Freddie Mac and Fannie Mae have made many policy statements regarding how these amounts will be paid back. Bottom line is that the borrowers are not required to pay it in a lump sum when the accommodation ends. They may defer the repayment until the loan is refinanced, the loan matures or the home is sold. Then, they can pay it as a lump sum at that point or negotiate a loan modification to spread the payments over time. I urge you to read the latest guidelines from them for greater clarification. I believe we will see similar statements from banks holding jumbo loans and for other federally-backed loans. Regarding other accommodations, I believe that voluntary accommodations on auto loans, cards, etc. will be smoothed out over some repayment plan arrangement. It would not make sense to grant forbearance and then demand a lump-sum payment, thus causing a default later. I have not seen any lender state that they would be demanding a lump-sum at the end of the forbearance but there is a lot of chatter from counseling agencies and others about how this is expected. If you have any lenders that have made a statement either way I would love to know about it.
Question: Is the HAMP a timed program and has ended that is why “1 yr., free rent no longer exists?”
Amy Crews Cutts: The HAMP program expired on Dec. 30, 2016, and for participants it modified the terms and other elements of the loan to make payments affordable to borrowers. Importantly, affordable was determined to be in the neighborhood of 30% of gross income, so still substantial. For those who had loan balances that significantly exceeded their property values, the incentive to default and go to foreclosure was strong – depending on where they lived, they could get at least a year of free rent by defaulting. In some states the median time between the due date of the last paid installment (DDLPI) and the foreclosed sale was more than 1000 days. They could continue to live in the house without additional housing expense. The hitch, of course, is that they did tremendous damage to their credit standing at the time.
What I meant in my presentation was that today homeowners with federally-backed mortgages get a year of no payments (a sort of free rent) if requested through the CARES Act forbearance accommodations. They are trying to make sure that financial stress doesn’t cause borrowers to go delinquent on their homes or dump properties on the market, thus supporting home prices and consumer housing wealth. So in essence, any borrower with a CARES Act covered loan can get the 1-year time out (not quite free rent) without a big credit impairment and without causing negative price externalities on the neighbors through a foreclosure.
Question: People can be adversely affected by forbearance if they decide to either refinance or sell and then buy another home because the forbearance will reflect as a negative on their credit, correct?
Amy Crews Cutts: Yes, you are right. Freddie Mac and Fannie Mae have policies limiting eligibility for refinancing if the loan is in an accommodation. Though the CARES Act requires that they be counted as “current” if that was their status prior to the forbearance, and the intent is not to do damage to a consumer’s credit record by using this provision. Lenders may of course weigh them negatively in their underwriting process. It is not a FREE lunch, but it is a good thing for consumers in the bigger picture, much better than what we saw in 2008.
Question: For decline in credit card debt, is there any insight into the FICO® bands that are decreasing their revolving lines.
Jennifer Cox: We don’t have this off the shelf, but can evaluate.
Question: What all is included in the Consumer Finance?
Amy Crews Cutts: Any tradeline that is not card, auto, mortgage, student loan, or home equity. It would include bank loans and lines, such as overdraft lines of credit, so called Fintech lending, regular finance company loans, rent-to-own etc.
Question: Has there been an increase in credit card use since the start of the pandemic? Reason I ask is due to attempts to reduce spread/transmission of the virus via cash.
Amy Crews Cutts: Yes and no. For the purchases that are occurring, yes, credit cards are the preferred payment method both online and in-store. But as I showed on the slide with retail sales, overall purchasing activity has declined significantly, hence the “no” part of the answer. Bottom line is that credit cards have gained even more dominance in transactions during the pandemic.
Question: By “inferred accommodation” do you mean that the issuer did not furnish the student loan with a deferral/natural disaster code, but simply reported no payment due?
Amy Crews Cutts: Yes, and this is true across all tradelines. Though it is a combination of rising balances and no payment due for non-student loan accounts, as no interest accumulates on federal student loans under the CARES Act for covered loans.
Question: Are creditors required to disclose pandemic related accommodations on credit reports or this optional?
Amy Crews Cutts: The CARES Act states that if they grant a pandemic-related accommodation that they must report the account at the status that the loan had at the time of accommodation (or if it cures, then report that status; student loans are to all be reported as current if federally backed) and that no payment is due during the accommodation period. On April 8 we gave a webinar that discussed the way to report accommodations under the Act. Unfortunately there is much room for interpretation. I wish they had used a new narrative code or one that was little used. Instead we have to cobble together the information. Most servicers are using Natural Disaster or Forbearance special narrative codes, for those that use the codes at all. Otherwise we infer an accommodation with the growth in the balance and a required payment of $0.
Question: Do you have any data on Solar loans in the payment hierarchy?
Tom Aliff: Solar loans would be included typically in personal loans based on how they are reported. We cannot identify this loan type independently, but can make inferences if there are known peer groups of lenders of this loan type.
Question: Why is student loan moving up the payment hierarchy? Are there real payments or just deferment?
Tom Aliff: The flag for payment hierarchy decline is a negative shift in delinquency status in the next month. This current view is a reflection of both accommodations as well as payment changes. We have seen an overall decline in student loan delinquency reported and it is certainly manifested in the numbers as other loan types have experienced a different rate of change in delinquency. We will continue to refine and build out these views.
Question: Personal loan is unsecured, but why is it in the second place in payment hierarchy, higher than mortgage?
Tom Aliff: We are showing the aggregate level of payment hierarchy this week. As the population shifts to super prime, the likelihood to pay a mortgage moves up to the highest. Many consumers leverage personal loans as a means of getting by at various times of distress. There are other nuances that exist depending on the population and segmentation. We should have a discussion on this topic if you have additional questions.
Question: If a bank had to turn off credit reporting on a forbearance for a month until it was able to have the system read it as current and then turns reporting on, what effect on a credit score would there be between the not reporting stage and the reporting stage, if any?
Ethan Dornhelm: For accounts that were last reported as current at the time the forbearance was granted, there should be minimal impact to FICO® score from this scenario.
For accounts last reported in delinquent status at the time the forbearance was granted, the borrower could potentially see an increase in FICO® score once the account begins reporting again with a current status. The degree of impact to score as a result of this scenario depends on the overall profile of the borrower. If the account in forbearance was the only one with a recent missed payment reported, then the score increase once the account is reported as current could be more material than if the borrower has a number of other accounts with recently reported missed payments.
Question: We have numerous borrowers who are complaining that the bank is causing their credit score to decrease due to reporting them during the forbearance period. We are reporting as current, with D’s in the payment grid, and the AW code. What is the cause for their decrease? Is it something we are doing? Would it have anything to do with the amounts owed not decreasing since payments are not being made?
Ethan Dornhelm: The FICO® score should not be affected by the reporting scenario you describe. From reporting special comment code AW to reporting the account as current with ‘D’ in the payment grid, none of that would have a negative impact on FICO® score. Nor would the score be negatively impacted by the amounts owed not decreasing. As long as the amounts owed aren’t increasing, the score should not be negatively impacted.
I can only speak to how the FICO® Score would be impacted by the reporting scenario described. There are a number of B2C websites that are providing non-FICO® scores to consumers; I would recommend that you reach back out to the affected customers to try to learn the website or app where they observed the credit score decrease. This will enable you to confirm the credit score version that is reflecting a score decrease, and to direct your inquiry appropriately.
Question: When you talk about credit balances and credit utilization on revolving accounts, is it most accurate to look at current balance compared to high balance or Max allowable balance (i.e.: my high balance on a card was $2,800, but my max allowable limit is $3,500)? At what percentage of that number does the score take a significant hit?
Ethan Dornhelm: Generally speaking, the revolving utilization calculation in the FICO® score evaluates current card balances in relation to current credit card limits. There is no hard and fast threshold for a utilization value at which the score takes a significant hit. The relationship between increases in revolving utilization and decreases in score is relatively smooth/gradual. While there are no hard and fast rules, I can share that our recent research has shown that the highest scoring 25% of U.S. consumers – those with FICO® Scores above 795 – use on average 7% of their credit limit.
Question: If a borrower has a delinquency before forbearance and then goes into forbearance, do they have the ability to remove the delinquency while in forbearance?
Amy Crews Cutts: Yes, under the CARES Act, if they cure the prior delinquency while in accommodation the servicers are required to report the loan in the improved status even if it is still in the accommodation period.
Question: If we have accounts that have been coded with AW. However, no accommodations were taken and the member is 30-90 days delinquent will that still affect their FICO® score?
Ethan Dornhelm: The reporting of special comment code AW alone will not affect a consumer’s FICO® Score. This means that if a tradeline is reported as current with special comment code AW, the score will treat that account as current. Likewise, if a tradeline is reported in delinquent status with special comment code AW, the score will treat that account as delinquent.
Question: Have either of their teams regressed “unemployment rates” to defaults for various loan types (auto, real estate, card)? If so, what have they learned?
Amy Crews Cutts: Not in this context. Local unemployment rates generally tie to higher delinquency (that is, a normal recession impact). There has been research at Equifax that looked at job changes (lost or gained) and the effects on delinquency (turns out both are negative, and likely due to either stress between the jobs, or maybe moving costs or celebratory spending for job gainers). The payment hierarchy is the best for this, but is now complicated by the forbearance reporting.
Question: What if a member was already in process of a modification prior to COVID-19 but was still making scheduled payments, then received notice for a new payment amount to pay for the following month? Would that cause a negative reflection in the credit score due to the modified payment amount?
Ethan Dornhelm: Assuming that no changes other than a new scheduled payment amount were made to the reporting of this account, the FICO® score would not be impacted by the scenario described.
Question: It would seem that FICO® scores will either remain flat or improve over the near term unless unemployment significantly increases? At what levels of unemployment do you see FICO® scores beginning to drop? > 20%, > 25, etc.?
Tom Aliff: Employment is not an input into FICO® scores. FICO® scores won’t drop until the financial stress being felt by consumers is reflected in their credit files, in the form of increased debt/utilization levels and missed payments. Even with unemployment at historically high levels, we have yet to observe these broad indications of financial stress in the credit file, due in large part to payment accommodations and stimulus programs. If accommodation plans are lifted and/or stimulus spending ramps down before the jobs market recovers, the financial stresses from the disruption to cash flow will start to be reflected in the credit file. And the FICO® score distribution will react accordingly.
Question: Is the general trend that the vast majority of issuers aren’t leveraging codes, but simply changing the status of the tradeline to current or maintaining the DQ status?
Jennifer Cox: No. The general trend is following the CARES Act reporting guidelines.
Question: Any thoughts as to how the rank ordering of FICO® will hold up, considering the stimulus impact the distribution differently?
Ethan Dornhelm: FICO regularly monitors our scores for shifts in distribution, odds-to-score relationship and model effectiveness. We have observed the FICO® score to be a stable and effective tool for rank ordering credit risk through substantial fluctuations in economic conditions previously. And we expect the score to similarly provide strong rank ordering during the current COVID-19 pandemic.
Given the unique and highly dynamic nature of the current situation, we are actively working with our partner Equifax to gain access to more frequent, refreshed data. Our intent is to be able to carefully monitor any near term shifts in FICO® score dynamics that may be resulting from the impact of COVID-19, and to report out to our clients (via webinars such as Market Pulse, via blog posts, etc…) on any such findings.
Question: You said you did not include HELOCs, were these personal lines of credit and credit cards or only credit cards?
Ethan Dornhelm: The credit line reduction simulation included both credit cards and personal lines of credit. HELOCs were excluded.
Question: We have some loans on a COVID-19 forbearance that were reported with an amount past due. Is there something in writing on how we should not include the amount past due so our management can have our IT group make adjustments? We are reporting as current but with an amount past due if no payment has been made.
Amy Crews Cutts: Please see CDIA and the Equifax Market Pulse April 8 webinar for more detail. But in short, you should report the level of delinquency at the time the accommodation was granted. That’s unless the account cures, in which case you should report the newly improved status. Unless it is a student loan account covered by the CARES Act, in which case you should report the loan as current during the forbearance period.
Question: I’d like your thoughts on the implications for the repair and service industry, given suppressed vehicle sales in March, April and May.
Jonathan Smoke: I think what we’re seeing now though is that service and repair was starting to recover, just like we’ve been seeing recovery in sales, but service and repair continue to have even more positive numbers through the Memorial Day weekend. I think this relates more to areas of the country opening up and people being more comfortable. Part of that comfort is more shops are offering pick-up and delivery and other forms of touchless, including sanitizing vehicles. And so I think a lot of that addresses the need. If you think about it from a typical downturn, usually service and repair thrives, it becomes the most important part of their business because if people are not trading in their vehicles and getting new ones, they have to take care of the existing one.
Question: What is the expectation for the Rolling 7 day supply for retail and wholesale once repossessions start to happen again? How will Hertz or BK impact this?
Jonathan Smoke: As I shared on the call, we will see more waves of supply– from rental, from repo, and from off-lease. The most worrisome time will be August through October. That’s not typically a strong time of the year for used vehicle demand.
Question: A multi-part question: 1) What were 2020 Memorial Day Sales for new and used cars versus 2019 and can you share the deviation in percentages? And 2) what is your forecast for 2020 car sales in the U.S.?
Jonathan Smoke: Not all data are final for Monday yet, but I would estimate new down 35% and used down 15-20%. Our forecast for new light vehicle sales is 12.3 million for 2020, with 11 million retail and 1.3 million fleet.
Question: How are Captives defined?
Jonathan Smoke: True Captives: dedicated to the manufacturer only.
Question: What is the impact of Hertz bankruptcy — short term and long term?
Jonathan Smoke: If you look at Hertz specifically, their current fleet is around 500,000 units in the U.S., but about 25% of that are program cars, actually vehicles owned by the manufacturers, that they would simply return. They wouldn’t be in a position of liquidating those vehicles. So, talking to others in the industry in terms of what they might have to do, we actually believe that you’re probably looking like a volume of about 200,000 units that would hit the market. And to give you a frame of reference: a normal wholesale market, a typical month over the last couple years, 200,000 has been roughly what we typically see in off-lease in a single month.
So, it’s something that the market can handle. If it all comes at once, and especially if it comes at a time that other volumes are coming in, like other rental car companies defleeting. Or if we see those lease extensions coming back home, which we do think are going to be significant later this summer and into the early fall, that’s where the risk on values is likely to be. Back of the envelope assessment of the Hertz risk specifically, if all of those were to hit the market at once, we probably would see a 2 to 3% decline in values while that happens, but then a recovery coming. And that’s just modeling based on what has happened historically when we’ve had rounds of significant rental units hitting the market when the market can’t absorb them all.
Question: Once repossessions ramp back up, since there may be a supply issue on new autos, is the thought that used car values will be stable to increasing? Or will there be so many hitting the market at once that the expectation is that used values will decline?
Jonathan Smoke: It’s tough to precisely predict because part of what we see right now is still a fairly tremendous decline in vehicle values. Even if May ends up cutting in half what we had in April, it’s still as bad as it was at the very worst point in the Great Recession. So, our view is actually that it’ll just keep values depressed because the market knows that those vehicles are going to be coming in at some point. And as I mentioned before, the concern would be that if you have defleeting in rental, Hertz bankruptcy, lease extension, and growth and repossessions all happening at the same time. That would produce volumes that the market wouldn’t be able to handle with just the natural sales.
We need to get through all of those risks before we can feel more positively. So, the good news is we’re fairly confident that we’ll get through that early next year. And if we look at the history, like in the Great Recession, you can see values fall by 10-12% in a short period of time. But typically they recover pretty aggressively because what happens is the wholesale market is going to be vastly undersupplied in a year because fleets are going to be smaller, there’s going to be fewer new vehicles produced and sold this year and next year. It eventually catches up and creates an environment where vehicle values are very strong.
Question: How much of the delinquency would you say is being masked by the deferments?
Amy Crews Cutts: There are two parts to this question. One is: should we say that there’s the real delinquency? That is loans that are reported as 60 days late, and loans that are in accomodation, and just add those two together to get this so-called true delinquency rate? The reason for giving a deferment is to try and keep that borrower and that loan from going to default. The last thing the lender wants is a repossession, especially as what we just talked about is if you end up with a lot of these happening very rapidly and you force those defaults and the repossessions. Then the recovery values are going to crater. And so the whole point of this is to not have that happen.
So, there’s somewhere between delinquent and not delinquent then, on that basis, and it will depend greatly on how this ends, and by that I mean both economically. Which is when does the economy get back enough on its feet that people can pay their bills? That they get their jobs back?
And the second part of that is how will lenders, as they exit borrowers from these accommodations into some sort of repayment plan, how is that going to shape up?
Question: What is driving dealer finance and credit unions seeing their best book of the last 5 years? Can you recap the drivers of this?
Amy Crews Cutts: On the dealer finance it may be due to the higher than expected losses on recent asset-backed securities the 2015-2017 vintages. Though independent and monoline finance companies, which also use the ABS market for funding, have not similarly responded. Credit unions are historically a little looser on credit scores in underwriting. But all else equal from what we can see in Equifax credit reports, have lower delinquency rates. Perhaps they were tightening in anticipation of recession. These are just guesses, as I have not done a poll to find out specifics.
Question: Are lenders required to code COVID-19 loans as deferred due to COVID-19 or is this optional?
Amy Crews Cutts: Under the CARES Act, if the accommodation is due to COVID-19 there are special reporting actions that they must take. Please see CDIA and the Equifax Market Pulse April 8 webinar for more detail on the reporting requirements and recommended guidelines for compliance.
Question: When do you think new car sales will go back to pre COVID-19 levels?
Jonathan Smoke: It’s easier to ask: Do we have a new forecast? And the answer is yes, and I think we’re going to have to be updating it at least every month for the foreseeable future, based on what’s really happening in the market. We’re expecting a total of 12.3 million like-new vehicle sales this year, and so that’s coming from 17 million last year, which would be a 28% decline, year-over-year. But I want to highlight that we also forecast what we think is going to happen with retail, so a lot of that decline is coming specifically in fleet, fleet has been playing an increasingly bigger role in the new vehicle sales numbers for the last couple of years, and actually we expect retail only to be down only 20%.
The answer to the question, when will we get back to 17 million, that’s actually tough to predict. I don’t think that’s a function of demand as much as it is supply, and we’ve never had a scenario like this. Every factory in the world has been shut down that supplies vehicles to the U.S. We actually think supply is going to be part of the challenge in the back half of the year in the new vehicle market. And it’s likely to keep us limited as well next year, even if we have a fully recovered economy. So, we’re not optimistic of seeing 17 million, at least for a while.
Question: Would you clarify the difference between captive creditors and dealer financed creditors?
Amy Crews Cutts: Dealer finance creditors are affiliated with dealer networks, like Byrider, as one example. They generally specialize in higher-risk or subprime loans. Captive finance is affiliated with a specific auto manufacturer, like Ford Motor Credit or Toyota Motor Credit. For this analysis we included CARMAX in the captive category.
Question: What do you see for incentives…huge spike in April/May due to 0/84 financing, will they drop over next six months as the industry experiences low inventory? Will they spike up more aggressively in the future once product is available and OEMs are competing in a lower industry for share and sales?
Jonathan Smoke: We think incentives, and especially related to finance incentives, those have been driving a lot of activity, but as we see inventory and supply numbers come down fairly aggressively, those incentives will come down as well, and there’s history for this also back from the Great Recession. So, over the next couple of months, I would expect them to still be high and fairly strong, but start to taper down. And, April was probably the peak in terms of the total numbers. And there’s probably going to be a shift later in the year away from how those incentives have been so heavily about expensive new vehicles and more in financing, to potentially more incentives directed at used and CPO, in particular. That’s really where the volume challenge is going to be when we get those off-lease vehicles later in the year.
Question: I am seeing reports that used vehicles are in high demand because mass transport is being avoided. What are your thoughts? What is the impact on value?
Jonathan Smoke: We do think this is likely playing some role, but it’s likely more a function of stimulus and pent up demand. Other countries like China are further along and seeing strong new demand because of fear of public or shared transportation.
Check here to see responses to top questions posed during our April Market Pulse webinars.
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