April Market Pulse: You Ask, We Answer

In this blog series, Equifax and expert guest speakers answer top of mind questions from attendees on the weekly Market Pulse Webinar Series. Check our blog after each webinar to find new Frequently Asked Questions. 

Guest speakers and Equifax subject matter experts answering questions include Amy Crews Cutts, David Fieldhouse, Jennifer Cox, Drew Rosedale and Tom Aliff.  Note: All views expressed by guest speakers are the views of that speaker and not necessarily the views of Equifax.

If you have questions about the webinars, please follow up with your Equifax account representative or email covid19customerquestions@equifax.com. April webinars include:

• April 29: Scenario Forecasting to Better Manage Risk and Expectations
• April 22: Retaining Customers in a Time of Uncertainty
• April 15: Understanding the Past to Help Inform the Future
• April 8: Impact of Current Environment on Credit Scores and Reporting

April 29: Scenario Forecasting to Better Manage Risk and Expectations

Question: What positive or negative impact does the record low price for oil have on the short-term or long-term economy.

Amy Crews Cutts: That's a complicated question. It benefits users of oil products through reduced prices, but harms domestic producers who cannot supply oil profitably at such low prices. In the past, users of petroleum-based products, like airlines, have been helped by lower prices. But the low prices are being driven by both the price war between Saudi Arabia and Russia and the drastic fall in demand as cars and planes stay parked and plants shut down. Some producers will be able to turn off wells temporarily, but others will go bankrupt and work on all uncompleted wells is being stopped. Oil resources will be lost forever if the wells are capped, but not maintained as happened in the 1980's oil bust. 

Question: I have heard commentary that some banks are reporting forbearance with the AW code, others are not reporting any data if there is delinquency, which might place a D code onto the report.  Since reporting is not unified across the industry, I am trying to figure out the various codes that can be used during this crisis that might help identify customers that are under stress due to the current environment.

 Tom Aliff: Adhering to the guidelines within the CARES Act will create the most consistency in approach and is what we recommend. We provided an overview of the reporting guidelines a couple weeks ago in our Market Pulse series. We can provide additional information via your account representative as needed.

Question: Is a 25% unemployment rate a real estimate for Q4?

Amy Crews Cutts: It is within the range of estimates from the Wall Street Journal Survey of Economists. We are all hoping we have been overly pessimistic, but an unemployment rate of 25% in Q2 is a real possibility based on the 30 million initial claims for unemployment reported through April 30.

Question: Do you think interest rates will continue to drop in the Mortgage Market?  

Amy Crews Cutts:  Yes, but not because I expect the 10-year to fall further. It's because I think spreads will narrow a little and that could buy us another 1/8 of a point, maybe as much as a quarter point.

Question: Are we seeing anything on card credit lines being contracted yet?

Amy Crews Cutts: Not yet. The credit limits as shown in the slides from Jennifer Cox on credit trends indicate balances are falling (likely due to transactions falling for consumer purchases and revolvers paying down balances). We are looking for indications it may be occurring and will update in future webinars. 

Question: Do the dropping credit card and bank card balances indicate that consumers are using resources to pay down existing or prior existing balances?

Amy Crews Cutts: Cards can be used for both borrowing and transactions. More likely is that transactors have cut back on purchases, bringing down outstanding balances due that are reported to Equifax.  

Question: In slide 23, how do you define accounts affected by disaster? What is defined as affected?

Amy Crews Cutts:  It’s from the narrative codes on records supplied by the furnishers. This was covered in the April 15 webinar from Equifax. CDIA has advised the use of this code when complying with the CARES Act. Please see the CDIA guidance on reporting.

Question: I have read that forbearance reporting on accounts has a neutral effect on credit scores. Based on what you presented, this is not the case. Does forbearance due to financial hardship cause a change in credit scores?

Amy Crews Cutts: Please see the webinar from April 15 and May 7 that discusses the impacts of forbearance reporting on a borrower's credit score from Equifax, FICO and VantageScore. 

Question: On slide 35, what is April S3 and April S4?

 David Fieldhouse: These are Moody's downside scenarios. In early April, the S3 scenario indicated that 10% of outcomes would be worse. The S4 indicated that 4% of outcomes would be worse.  

Question: With the mortgage forbearance in full swing, it is reported that lenders are pulling back dramatically on lending. Why lend to someone who can easily then say "I don't want to pay my mortgage for one year" with little or no impact on my credit score. What does that mean broadly for housing and the previous expectation that housing was to remain an area for strength continuing this year? 

Amy Crews Cutts: I think that the pull back in lending had more to do with ill-liquidity on the part of nonbank lenders until the servicing issues were resolved this past week. Investors are made whole if the loan is in a Freddie Mac/Fannie Mae or Ginnie Mae security so the lender could originate the loan, sell to GSEs, and portfolio the security - the forbearance not really their problem. At present borrowers only have to state that they have been affected without documentation. I suspect that may get amended.

Question: In your simulation of credit scores and conclusion that KSs will decline very little, aren't you just simulating how scores will change (very little)  but assuming the loan outcome stays the same?  Isn't this misleading as loan outcomes will not stay the same in a recession, and typically there is a decline of score rank ordering during a recession?  

Tom Aliff: Yes, this is correct that all other things were held constant to isolate this change alone. We also expect, per your hypothesis, the need to monitor and adapt to changes stemming from unemployment, decrease in disposable income, changes in utilization, and subsequent behaviors such as payment hierarchy. 

Question: When is the second blow to the auto market expected to hit per the forecasting?

David Fieldhouse: The second punch to demand from a COVID-19 recession will come as people rationally react to lost jobs and wages, the negative wealth effect as the bear market deepens, and continued uncertainty by pulling back on spending. This will in turn keep demand sapped through the end of 2020 and into early 2021 

Question: So the deferral on credit cards that are occurring, won't delinquencies remain artificially low since these can't be reported as such; to Amy's comment on social messaging, aren't banks going to potentially over do their loan loss reserves (despite CECL)? Hard to estimate losses when those accounts are not technically recorded as "delinquent."

Amy Crews Cutts: There are so many implications of all the moves. Equifax is working on weekly updates on reported forbearances on all tradelines (broken out separately). The long play is that a forbearance with a cap & reinstate workout will reduce overall true defaults. CECL rules have been relaxed. There are a lot of requests for "What happened when" analysis. My own research in mortgage forbearances at Freddie and by Sumit Agarwal show lower losses by far with a forbearance with workout rather than no workout. More to come. 

Question: Are you already seeing Auto prices dropping in the market? Or is the drop-off part of your forward-looking forecast?

Amy Crews Cutts: Declining used car prices have been documented in the auto industry. This will impact the loss forecasting by auto lenders and may help underwrite forbearance decisions. These are not direct inputs into the Equifax models, however, Moody's does include auto values in its forecasts.

Question: What will be the impact on recreational merchandise loans on boats and RV's. Will they behave more like auto or more like mortgage?

David Fieldhouse:  I'd expect them to behave more like Auto than Mortgage.  

Question: Are you saying that subprime auto loans are going to have a higher default than during the financial crises? 

David Fieldhouse: Yes once we control for origination risk score. 

Question: Why will California and New York, two of the hardest hit by COVID, and places with the highest housing prices, have lower default rates than Florida? I'm struggling to see any data justifying these claims.

David Fieldhouse: These states have greater housing affordability issues which mitigate some of the decline in the market. California is not expected to have house price declines, while New York will be below the national average. There are also different risk profiles across each state and lastly the labor markets will unfold differently. 

Question: On the Bankcard defaults, does the model include Government Transfers (UI benefits and CARES Act bonus)? 

Amy Crews Cutts: Not specifically, indirectly within macroeconomic variables. 

Question: What impact is age having on credit quality and forbearance? Seems like younger people or younger credit files are being impacted more by the economics of this crisis.

Jennifer Cox: We will address this in the May 7 webinar. 

Question: Amy said big losses later are unlikely as lenders will continue to find solutions - "not kicking defaults down the road." But David just said card defaults could be equal to or greater than recession. Can you reconcile those two comments for me?

Amy Crews Cutts:  The two are not completely incongruous. Lenders are offering forbearance because they believe now that the consumer is likely to make good on the debt in the future. This is the best loss mitigation strategy. I believe they will work out a repayment plan that is not simply lump sum. Again as loss mitigation. In David's Moody's forecast, they model the economic impact of macro variables on expected default rates. They have no way to enter in federal policy mandating forbearances nor changes in lender policies that would result in deferred payment with workouts in the future. As such, it is one scenario among many to consider among the range of possibilities. 

Question: Year over year, how do you see the mortgage market performing for the rest of the year?

David Fieldhouse: The mortgage market will hold up somewhat, but regional impacts will vary. House prices are forecasted to drop less than 5%. 

Question: Can you please explain why the S4 4% downside has higher default percentage compared to S3 that has 10% downside on the last slide on: Uncertain Bankcard Outcomes? 

David Fieldhouse:  The S4 has an unemployment rate peak of 18% while the S3 has an unemployment rate peak of 16%. 

Question:  The unemployment forecast, shared by David Fieldhouse projected a "W" shape. Do you mind sharing some context in regards to what may be driving the uptick in unemployment after the recovery, and any hypotheses on which sectors in particular? Also noted GDP forecasts in previous webinars, how does that look now? 

David Fieldhouse: The first contraction is the current deep slide caused by the lockdowns on the supply side. Then there is a bounce when businesses begin to reopen, and then another slump as consumers and businesses remain cautious until a vaccine becomes available and the economy fully engages. Peak to through baseline GDP drops 10.5%.

Question: Is the forbearance data based only on those furnishers who utilize the code CP?  Media reports that lenders are using forbearance in a much greater percentage.

 Jennifer Cox:  Yes, the rates reported are preliminary rates based on AW and CP codes reported. There will be a lag in reporting. We will continue to track. 

Question: I may have missed it but is there any forecast in increased bankruptcy filing based on the historical trend? Also, does these delinquency projections consider potential tightening of risk appetite due to projected increased losses?  

David Fieldhouse: CreditForecast.com has bankruptcy forecasts that are going above trend. The models control for risk tightening through  credit scores and the economic climate of origination.

April 22: Retaining Customers in a Time of Uncertainty

Question: How are you defining "applying for credit?" Any type of inquiries, just revolving, etc?

Jennifer Cox: Any type of inquiries coming into Equifax. Today, we shared the macro view, but can easily segment by product type, etc.

Question: Any thoughts on increased inflation risk and what effects that may or may not have on the economic recovery?

Amy Crews Cutts: Inflation would be a wonderful problem to have. Right now we are worried about significant and long lasting deflation. Once we get past the economic bottom, some inflation is expected. Some of the helicopter money from the Fed can be reeled back in, and the CARES Act payments to households is an advance on 2020 tax refunds. Again, that money comes back out. Inflation is much easier to fight than the current problems the Fed and Congress are working on.

Question: What do the econometric models forecast for the 2nd half of 2020 and 2021 with and without effective testing and with or without a 2nd wave of COVID-19?

Amy Crews Cutts: Several firms like Moody's Analytics, Oxford Analytics, KPMG, etc. have published forecasts with V, U and W shaped recoveries as different scenarios for their clients. The V implies big improvement in Q3/Q4. Or if you like the idea of a lazy-V or Checkmark shaped recovery, then there will be some meaningful improvement in Q3/Q4 with long slow recovery. The U-shape implies things stop getting worse, with bottom in 2Q or maybe 3Q, but we linger in the depths longer. That could be more than 9-12 months, pushing start of recovery into next year, followed by relatively sharp improvement. The Ws are always worse, because the second leg is expected to be sharper because businesses will have burned through reserves and we will be without the ability to convince people to stay home again.

Testing and continued Federal assistance is key to all good-scenario forecasts. Without testing and tracing available to all on demand and further stimulus of the right (generous) scale, we don't get the V. I am in the "lazy V" or "Nike-Swoosh" camp for recovery. If the V-conditions I just outlined are met, l think we will get a good bounce off bottom and then a long slog back to pre-COVID 19 levels. This is my baseline forecast, and Q3 will be better than Q2 unless the reopening is too fast and testing too slow, or in the event that the fiscal stimulus spigot runs dry. I told the WSJ last week it will take five years or more to get employment back to those levels under my lazy V scenario, in part because this recession will cause structural shifts in the way we work.

Question: Will defaults on home loans happen when banks ask borrowers to pay back in one lump slum, causing housing prices to fall?

Amy Crews Cutts:  The GSEs (Freddie Mac and Fannie Mae) have said they will not require lump sums. For example, Freddie Mac made this clear recently on its website. I do not believe that lenders outside of the GSEs, or even outside the mortgage space will demand lump-sum repayment either. The decision to voluntarily grant a temporary forbearance is predicated on the lender believing that the borrower will make good on the debt over time, if given the chance. The highest chance of success is to put the borrower on a repayment plan or to rework the loan terms when the forbearance ends. Granting a forbearance and then demanding a lump sum payment that causes financial distress and default is not in anyone’s economic interest. If the lender does not think the borrower can make good on the debt in the scenario above, then the better answer is to take the loss today on the account if this is the inevitable result.

April 15: Understanding the Past to Help Inform the Future

Question: Please define forbearance and deferment.

Jennifer Cox: Under forbearance, loan payments are postponed (or reduced), but interest continues to accrue during the period of forbearance. In deferment, the borrower does not have to pay interest or repay the principal on a loan. A deferment period is also the period after the issue of a callable security during which the lender can not call the loan. 

Question: What are some examples of Specialty Finance Lenders?

Tom Aliff: Specialty finance can be broadly defined as any financing activity that takes place outside the traditional banking system. Typically, specialty finance firms are thought of as non-bank lenders that make loans to consumers and small to midsize businesses, such as payday lenders, rent to own, etc. 

April 8: Impact of Current Environment on Credit Scores and Reporting

Question: When are you expecting the recession to start?  

Amy Crews Cutts:  I believe it has started already—March 6 for an exact date. The question now is how bad will things get and when will the recovery begin. On the former, I believe there is a strong commitment on the part of the Fed, regulators and Congress to do what is needed to limit the damage, to flatten the economic curve. On the latter, it will depend on our access to testing, the ability to open state economies gradually, and a continuing commitment to do what is necessary from in fiscal stimulus and regulatory flexibility to stay the course.

Question: The unemployment numbers are staggering, but also hard to interpret because it's not clear how many of those folks will be rehired as the economy recovers. Is there any distinction between people who just lost working hours vs. those who lost their job entirely?

Amy Crews Cutts: I think the damage won't go away overnight. Many impacted workers filed for unemployment insurance weeks ago and still have not received a payment. The systems are overloaded. reduced hours = reduced income that they won't get back later. So the impact of that may last a long time. Regarding rehiring, much will depend on the economic viability of those businesses. Restaurants operating at 25% capacity, for example, will not need the same number of waitstaff. I do have some optimism that the bulk of layoffs have been deemed temporary and that these workers will get called back. There is a difference between those who have reduced hours and those who were outright laid off in that there may be some benefits that they continue to receive, such as employer supported health insurance, that they might otherwise lose. These workers will be first in line for additional hours when things do open back up.

Question: What are your thoughts on the prospects of a deflationary period as we continue in (and then emerge from) the COVID crisis? 

Amy Crews Cutts: It is possible—some economists are forecasting that likelihood and many more are worried that if it happens it may persist for more than a month or two. I think for some products, like gasoline, we are already seeing that, and it is likely that the sales that will happen as retailers go under, or even fight to stay afloat, could lead to deflation in near term, but those effects would be short lived. The enormity of the demand shock has us guessing as to what will occur, and the possibility of deflation does give the Fed and Congress more room to add stimulus for now.

Question: For CARES Act guidance of reporting, is the accommodation period only applicable to those who have indicated they are impacted by COVID-19 or should we be applying this logic to all members?

 Drew Rosedale: We recommend discussing with your legal/compliance teams, but the CARES Act identifies those who indicate they are impacted. 

Question: If a customer is past due, and the special comment code AW is added to their tradeline, does the AW negate the past due reporting?

Drew Rosedale: No. If there is a past due amount prior to contact/accommodation, you should continue to report the same past due amount. If there is no past due amount prior to accommodation, the past due amount should be zero. 

Question: If we added the AW code to a number of our borrowers that were delinquent... is that inappropriate?  

Drew Rosedale: There is no issue with using the code. I would make sure if the borrower has contacted you and you have made accommodations that the delinquency doesn't progress further. 

Question: For our borrowers that are on a deferral payment plan... is it wrong to have them on an AW notation if we are doing everything else as outlined in the CARES Act? 

Drew Rosedale: I do not think that is an inappropriate approach. Consult FAQ 58: Deferred - Natural Disaster in the CRRG just to be sure. 

Question: For Vantage Score 3.0/4.0, how is the exclusion of delinquency PRIOR to the disaster performed?  

Vantage Score: When the AW code is present on the account, the complete payment history is excluded from the calculation for the duration the code remains on. 

Question: If an account becomes delinquent due to COVID19, are we not reporting the delinquency? How should it report?

Drew Rosedale:  If a consumer contacts you and you provide accommodations and they were current prior, then they should stay current. If they were delinquent prior, they should not go any further delinquent for the covered period as defined in the CARES Act.

Question: I did not see anything in your presentation about data furnishing as it relates to debt collection. And do we have to do anything differently if we are in a state where no directives were issued? Can we continue to report as usual?

Drew Rosedale:  I would recommend consulting with your legal/compliance group as it relates to new collections (post January 2020). 

Question: How do we sign up for the free credit trends report through the end of the year? 

Jennifer Cox: You see all weekly credit trends reports on the Market Pulse website.