August ’20

The BAN Report: PPP Update / Small Business Optimism Rises / The Rent is Too High! / The BAN Interview / The 8MM Skilled Nursing Relationship-8/13/20

PPP Update

Please forgive me, I know not what I do.” -Bryan Adams

This week, the SBA opened up its forgiveness portal so lenders can begin applying for forgiveness. Some are choosing though to wait for congressional action.

Those who participated in the $659 billion program must determine if they are ready right now to navigate the complex system for having loans forgiven, or if it makes sense to wait and see if Congress intervenes and simplifies the process. That decision was complicated over the weekend when talks about a new round of stimulus collapsed, casting doubt on when — or if — PPP will get an overhaul.

A number of banks, including JPMorgan Chase, the program’s biggest participant with $29.2 billion in PPP originations, plan to hold off on processing applications. The $3.2 trillion-asset banking giant will start the forgiveness process next month, said Kimberly Hooks, a vice president at Chase Business Banking.

JPMorgan Chase is backing a push for automatic forgiveness “as it would help thousands of small business owners get back on their feet,” Hooks added.

There’s a push to forgive all PPP loans under $150K, so why burn a bunch of calories processing forgiveness? Of course, some borrowers are anxious to get these loans forgiven, so its going to be hard to hold off for too long.

PPP officially ended last Saturday with $134 billion in unused PPP funds. There is a push for a new PPP lending program in Washington, which would be targeted towards more distressed businesses.

Lawmakers are considering extending the P.P.P. in some form. Senate Republicans have proposed letting companies whose sales have fallen by 35 percent or more get a second loan. Other ideas kicking around in Congress include expanding existing low-interest loan programs offered by the Small Business Administration and increasing tax credits for companies that retain workers. Lobbyists are also pleading for bailouts for specific hard-hit industries.

It’s hard to keep up with the back and forth on the stimulus discussion, but a new extended PPP is part of the discussion. Unfortunately, it seems like SBA lending right now begins and ends with PPP.

Supply and demand for small-business loans outside of the now-idling Paycheck Protection Program have been lackluster — and should remain that way for the rest of 2020.
A blurry economic outlook, marred by the uncertainty of the coronavirus pandemic, is reducing banks’ risk appetite. At the same time, demand for non-PPP loans has cratered as businesses freeze investment plans and cut costs.

The Federal Reserve’s Senior Loan Officer Opinion Survey for July found that 70% of lenders tightened underwriting standards for loans to small businesses. Demand from those clients plummeted by 29% between April and July.

A separate survey by Biz2Credit determined that the approval rates for small-business loans had fallen from 28.3% in February to 13.8% in July at banks with more than $10 billion in assets. Smaller banks, which approved half of their applications in February, signed off on less than a fifth of them last month.

“Standards have tightened and demand has declined to levels not seen since the great recession,” the research team at Raymond James said in an Aug. 3 client note. “We expect conditions to remain tight with limited demand for new loans … until a resolution of the pandemic becomes apparent.”

It’s not surprising lenders are cautious. On October 1, SBA stops making 6-months of P&I payments on 7(a) and 504 loans and an uptick in small business defaults and/or deferments seems inevitable.

Finally, the SBA released updated FAQ for PPP and PPP forgiveness, as well as the rules for appealing a forgiveness.(Loan Forgiveness FAQPPP FAQ, and IFR Loan Review Decisions under the PPP)

Small Business Optimism Rises

Due to PPP and other factors, small businesses are increasingly optimistic that they can survive the pandemic.

The pandemic is still raging on in the U.S., yet 64% of small business owners on Main Street are confident that they can survive for more than a year under current conditions, the Q3 CNBC|SurveyMonkey Small Business Survey revealed on Monday. Surprisingly, that is nearly double the 34% that held this optimistic view when polled in April. And 46% of those surveyed say they expect their company’s revenue to increase over the next 12 months.

The study polled 2,040 small businesses nationwide July 20-27 in a wide swath of industries from food services, retail and consulting to manufacturing and construction. Fifty-three percent of respondents were sole proprietorships or S Corporations and 80% had less than 20 employees.

According to small business experts, this turnaround in attitude may be due to many factors. One is that government programs, including the Paycheck Protection Program and Small Business Administration economic injury disaster loans (EIDL), have given some businesses a life preserver to ride out the economic uncertainty. And the loans have given owners time to pivot and reinvent their business models so they survive the new normal.

There’s no question that small businesses can see the light at the end of the tunnel. Now, if we could only get a vaccine soon!

The Rent is Too High!

A few years ago, a candidate for Governor in New York ran under a simple platform – the Rent is too Damn High!   Retail tenants in Manhattan are increasingly in agreement.

Michael Weinstein, the chief executive of Ark Restaurants, who owns Bryant Park Grill & Cafe and 19 other restaurants, said he will never open another restaurant in New York.

Of Ark Restaurants’ five Manhattan restaurants, only two have reopened, while its properties in Florida — where the virus is far worse — have expanded outdoor seating with tents and tables into their parking lots, serving almost as many guests as they had indoors.

“There’s no reason to do business in New York,” Mr. Weinstein said. “I can do the same volume in Florida in the same square feet as I would have in New York, with my expenses being much less. The idea was that branding and locations were important, but the expense of being in this city has overtaken the marketing group that says you have to be there.”

For four months, the Victoria’s Secret flagship store at Herald Square in Manhattan has been closed and not paying its $937,000 monthly rent. “It will be years before retail has even a chance of returning to New York City in its pre-Covid form,” the retailer’s parent company recently told its landlord in a legal document.

“In the prime real estate areas, all the stores rely on having half international tourists and half local tourists or those from the local neighborhoods,” said Thiago Hueb, a founder of a jewelry company who had decided to close his flagship store on Madison Avenue before the pandemic struck because of high rents.

How can you possibly make money paying rent of $937K per month?   At a typical retail mark-up you would most likely need to make $2MM per month to break-even. If we allow market forces to work, such as allowing landlords to evict tenants and banks to foreclose or force landlords to sell, we would end up at a place in which a tenant can afford a monthly lease payment.

The BAN Interview

This week we launched a new monthly podcast series, “The BAN Interview,” in which we interview leading experts in the financial services industry.   We started off with a highly topical discussion with Glen Messina, President & CEO of Ocwen Financial, in which he shared his insights on residential servicing, default management, and the mortgage industry.   Attached is the complete podcast and here are a few excerpts:

Jon Winick: Glen, why don’t you tell us what Ocwen does?

Glen Messina: Sure Jon. Ocwen is one of the leading mortgage special servicers and originators. Our focus is creating positive outcomes for homeowners, communities and investors. We have two principal business units, servicing and originations. In servicing, we’re one of the largest and most experienced special servicers. We have strong subservicing and specialty servicing capability that includes, conforming mortgages, small balance commercial loans and private securities. Our originations business helps replenish and grow our servicing portfolio. We’ve built a diverse, multichannel originations platform in both forward and reverse mortgages that’s grown 14X in the past year.

Since the great recession, there has been a pretty noticeable transition for mortgage servicing from banks to non-banks. Do you see this trend accelerating or continuing and why is this happening?

I think in the current environment where we’ve got a significant increase in credit stressed borrowers, we believe that this trend is likely to continue and perhaps accelerate. During the last housing crisis that was tied to the financial crisis, banks generally avoided taking on mortgage default risk. It’s a tough business, there’s lots of compliance aspects to it. And obviously you have to have some challenging conversations with borrowers. And I think banks generally did not look at that side of the servicing business favorably. I think there’s going to be a tendency for servicing to shift, especially special servicing, or default servicing, to shift back into the non-bank sector.

The second reason I think the trend may continue is generally the non-bank sector does a greater share of refinancing originations than the bank markets do. And, since non-banks including those that choose to retain servicing are likely to do a greater share of refi’s in this environment, I would expect that servicers are likely to gain again, as refinancing comes into the servicing marketplace.

One of the reasons we had you on today, Glen is loan workouts are a hot topic.  And certainly few companies have more experience than Ocwen.  What has Ocwen learned that has worked well during the last cycle?

As I mentioned earlier, we led the industry in creating non-foreclosure outcomes for borrowers and investors coming out of the last crisis. One of the reasons why we did that is foreclosure is just not good for anyone.  It’s a horrible experience for the consumer. It creates risk for communities, and you may have the tendency for abandoned properties, which is just not good for a community and investors don’t want to lose cashflow.

What’s your typical modification plan for a consumer who’s having some stress most likely due to COVID-19?

In COVID-19, I think we’re still in early innings, Jon. We’ve not seen a lot of borrowers moving into a modification coming out of a COVID forbearance. What we have seen is roughly 35% of our borrowers who are on forbearance plans are making their payments, which is a good thing. And, as borrowers are coming up to the expiration of their initial forbearance period, roughly two thirds of consumers are rolling their modification plan, and roughly 22% or so are fully reinstating. Then I’d say the remainder are thinking through what their options are, and we’ve only seen about 1% go to loss mitigation. So it’s a fairly small population.

For lenders that need your default management experience, what sort of opportunities is Ocwen looking at?  

We think we’ve got a very effective servicing platform. When you look at our ability to service loans on a cost competitive basis, in the second quarter we shared our cost per loan statistics as measured by the Mortgage Bankers Association, we are highly competitive for performing servicing cost per loan, as well as on non-performing loans we are running about half the level of other large servicers or special servicers within this space. We have roughly, as of last count, 179 subservicing clients.  We are capable of handling portfolios of any size. For any of your listeners who need help or want to explore subservicing with Ocwen, email us at businessdevelopment@ocwen.com.

Well, switching over to the origination side, thanks for your thoughts on servicing, the 30-year fixed rate reached an all-time low last month. So practically every American who is eligible should consider refinancing today. How long do you think this mortgage origination boom will last?

I hope it lasts forever, but you know, the reality Jon is I don’t think I’m any better at predicting the directionality of interest rates, which will affect the refi boom, any better than economists out there. If I look to what the Mortgage Bankers Association is predicting, they’re suggesting a total industry origination of about $2.8 trillion this year and tapering off to about a $2.1 trillion market next year. Both the $2.8 and $2.1 trillion numbers are massive industry volume levels. If you think back to the 2013 – 2014 timeframe you were looking at industry volume levels of maybe $1.2 to $1.4 trillion. So, a doubling of the market. As we look at some of the indicators out there that would give rise to why we think it’s going to last that long, or why the MBA thinks it’s going to last that long.

I don’t know much about this reverse mortgage market, and something there very few players in it. Could you maybe tell us a little bit about the reverse mortgage market?

We like our reverse mortgage business. It is a niche market. There are about 650,000 reverse mortgages outstanding. The top 10 reverse mortgage lenders make up about 70% of the market. So it’s much less fragmented than the forward market, and our subsidiary, Liberty Reverse Mortgage, is third ranked.
It’s a way for seniors to save money, build equity, stay in their homes, and it gives them either cashflow over time or cashflow in a lump sum to meet their needs. Bottom line is we like the space. It lines up with our mission of creating positive outcomes for homeowners, communities and investors.

Can you touch on a little bit, your litigation with the CFPB, to the extent you’re able to?

Sure.  The CFPB lawsuit was filed on the same day in April 2017 as the state of Florida’s lawsuit. We recently held our earnings call, and we reported that there has been continued favorable developments in the CFPB and Florida matters. The presiding judge ruled to combine the cases into one. The judge also ruled that the matter would be tried as a bench trial, not a jury trial. Additionally, the judge has postponed the trial, which was scheduled to begin this October and has ordered the parties to mediation.

Obviously we’re now five months into this pandemic, how’s a remote working, working out for you and the company. And are you anxious to get back to the office or do you have immediate plans to do so?

Yeah, I couldn’t be more proud of my team. You know, we, as a lot of other businesses, decided in early March to transition to a fully remote work environment. Our human resources team, our operations team, our IT team just did a spectacular job of moving the company in a very short period of time to a 100% remote work environment with the exception of certain jobs that absolutely needed to be performed in the office.

We did an employee survey after a couple of months in a remote work environment. And, I’d say roughly somewhere between 70 to 80% of our employees love it. They like the flexibility of working from home. They feel they’re more productive. They feel they can manage life better. It’s easier for them to flex work and family situations while they’re working from home. Productivity on average has gone up, and again, employee satisfaction is at record levels. So, I think the transition was managed very well. I think our employees adapted quite well.

Great. Well, Glen, this has been an informative and enlightening discussion. Thank you for your time and candor. Congrats on the strong quarter at Ocwen as well. And, we look forward to hearing more from you and Ocwen in the future.

Great, Jon really appreciate it. Thanks for your questions and appreciate the opportunity to be on your podcast

The 8MM Skilled Nursing Relationship

Clark Street Capital’s Bank Asset Network (“BAN”) proudly presents: “The 8MM Skilled Nursing Relationship“. This exclusively offered portfolio is offered for sale by one institution (“Seller”). Highlights Include:

Files are scanned and available in a secure deal room and organized by credit, collateral, legal, and correspondence with Asset Summary Reports, financial statements, and collateral information. Based on the information presented, a buyer should be able to complete the vast majority of their due diligence remotely. 
 

Event
Date
Sale Annoucement
Thursday, July 23, 2020
Due Dilligence Materials Available Online
Monday, July 27, 2020
Indicative Bid Date
Thursday, August 20, 2020
Closing Date
Thursday, September 10, 2020


Please click here for more information on the portfolio. You will be able to execute the confidentiality agreement electronically. 

The BAN Report: Credit Tightens / Consumer Credit Update / Retailers Use BK to Reject Leases / The Big Fight / Kodak’s Wild Ride / The 8MM Skilled Nursing Relationship-8/6/20

Credit Tightens

This week the Federal Reserve released its quarterly Senior Loan Officer Opinion Survey on Bank Lending Practices. Aside from residential real estate loans, both demand for credit lessened while underwriting standards tightened.

Regarding loans to businesses, respondents to the July survey indicated that, on balance, they tightened their standards and terms on commercial and industrial (C&I) loans to firms of all sizes. 2 Banks reported weaker demand for C&I loans from firms of all sizes. Meanwhile, banks tightened standards and reported weaker demand across all three major commercial real estate (CRE) loan categories—construction and land development loans, nonfarm nonresidential loans, and multifamily loans—over the second quarter of 2020.

For loans to households, banks tightened standards across all categories of residential real estate (RRE) loans and across all three consumer loan categories—credit card loans, auto loans, and other consumer loans—over the second quarter of 2020 on net. Banks reported stronger demand for all categories of RRE loans and weaker demand for all categories of consumer loans.

The second quarter represented the most dramatic tightening of credit since 2008-2009. For large and middle-market C&I loans, banks are reducing maximize loan sizes for credit lines, shortening maturities, increasing yields and fees, charging more for risk, tightening covenants, and increasing collateral requirements. The two highest reasons cited for tightening include a less favorable or more uncertain economic outlook and a worsening of industry-specific problems. For CRE loans, banks tightened even more as 81% tightened standards for C&D loans and 77% for CRE loans excluding multi-family.

On the mortgage side, both QM and non-QM jumbo loans saw the greatest amount of tightening, and some stopped originating jumbos completely. Essentially all consumer loan categories saw tightening and virtually no respondents lowered underwriting standards. Nevertheless, while the tightening of standards was noteworthy and comparable to 2008, lenders have not hit the brakes completely as they did in 2008. Credit is still available, albeit under more stringent terms and conditions. Lenders are also less eager to add new customers.

Credit card companies, for example, mailed out 57 million offers to consumers in June, a historic low and down from 272 million a year earlier, according to Mintel, a research firm that has been tracking the offers since 1999. Some banks have stopped offering the types of cards that attract people who may be focused on paying down debt.

JPMorgan Chase, for example, will make mortgages to new customers only with credit scores of 700 or more (up from 640) and down payments of 20 percent or higher. USAA has temporarily stopped writing jumbo loans, which are mortgages that are generally too large to be backed by the federal government, among other products. Bank of America said it had also tightened its underwriting, but declined to provide details.

All of this is responsible lending. Banks are responding prudently to a more challenging environment.

Consumer Credit Update

According to a creditcards.com survey, many consumers are poised to miss credit card payments within the next few months.

Sixty-two percent of those with credit card debt said they won’t be able to make minimum payments in the next three months if the pandemic continues, according to a CreditCards.com poll.

The new survey, conducted in mid-July, reveals 61% will be affected if they’re unable to work now or in the future, 56% if there is no more government stimulus money and 26% when the $600 weekly supplemental unemployment benefits end.

Millennials are the most concerned about being in debt – 87% said they won’t be able to make minimum payments if they’re unable to work, 79% won’t if COVID cases continue to surge, 72% if there’s no more government stimulus and 47% when the supplemental unemployment benefits end.

“So far, I have been pleasantly surprised how few people have fallen behind on their payments during the pandemic,” said CreditCards.com industry analyst Ted Rossman.

But he cautioned that these statistics have been aided by a tremendous number of government stimulus and lender hardship programs.

The lack of delinquencies to date may be artificial, and when the stimulus stops, the surge in delinquencies will have been delayed, not avoided.

“We need to stay tuned because Congress and the White House are currently working on another round of potential stimulus – this situation could change within the next couple weeks,” Rossman said.

It appears many consumers will run out of gas without additional government stimulus. But they have so far stayed largely afloat. For the seventh straight week, the share of mortgage loans in forbearance has declined to 7.67%.

The Mortgage Bankers Association’s (MBA) latest Forbearance and Call Volume Survey revealed that the total number of loans now in forbearance decreased by 7 basis points from 7.74% of servicers’ portfolio volume in the prior week to 7.67% as of July 26, 2020. According to MBA’s estimate, 3.8 million homeowners are in forbearance plans.

The share of Fannie Mae and Freddie Mac loans in forbearance dropped for the eighth week in a row to 5.41% – an 8-basis-point improvement. Ginnie Mae loans in forbearance increased by 1 basis point to 10.28%, and the forbearance share for portfolio loans and private-label securities (PLS) decreased by 16 basis points to 10.37%. The percentage of loans in forbearance for depository servicers dropped to 7.95%, while the percentage of loans in forbearance for independent mortgage bank (IMB) servicers decreased to 7.81%.

It appears the initial mortgage forbearance wave is behind us and more borrowers are coming off forbearance plans than beginning them. It remains to be seen what happens when this massive government stimulus wears off and the economy must stand on its own two feet.

Retailers Use BK to Reject Leases

25 major retailers have used the bankruptcy process to reject property leases, thus creating potential problems for their landlords and their lenders.

With the pandemic intensifying the plight of U.S. retailers, companies from J. Crew Group Inc. to the owner of Ann Taylor are using Chapter 11 bankruptcy filings to quickly get out of costly, long-term leases and shutter thousands of stores.

By seeking court protection, firms like Neiman Marcus Group Inc. and the parent company of Men’s Wearhouse avoid the headache of protracted negotiations with individual landlords. But the moves threaten to upend huge swaths of the real estate market and the half-trillion dollar market for commercial mortgage-backed securities.

“This is now black-letter law — a debtor can cram down a landlord,” said Melanie Cyganowski, a former bankruptcy judge who’s now a partner at law firm Otterbourg PC. “If this becomes a tsunami of retailers rejecting their leases, it’s going to trigger another part of the sea change — the mortgages held by the landlords.”

As bankrupt firms like J.C. Penney Co. and Brooks Brothers Group Inc. look to jettison leases, landlords are already feeling the consequences. CBL & Associates Properties Inc., owner of more than 100 shopping centers in the U.S., is preparing its own bankruptcy filing after rent collections cratered. And 16% of retail property loans bundled into CMBS were delinquent in July, according to research firm Trepp.

We asked a leading bankruptcy attorney about whether a landlord can do much to stop a tenant from rejecting a lease in bankruptcy. He opined:

“It’s very tough for a landlord to fight a lease rejection. It’s the debtor’s business judgment, to which the courts usually defer. And they are often packaged into ‘omnibus’ lease rejection motions where the debtor will reject dozens of leases at a time. Sometimes you will see skirmishes over when, exactly, the rejection is deemed effective (the debtor needs to pay post-petition, pre-rejection rent on a current basis, but can stop once rejection is effective).  Usually I will see the rejection being effective as of the date the motion is filed, and courts generally seem ok with that.”

In short, there is little a landlord can do to some their tenants from using bankruptcy to get out of their lease obligations.

The Big Fight

Insurance companies love to collect premiums but can be stingy in paying out claims. Many businesses thought they were covered for business interruption insurance due to COVID-19, but insurance companies have refused to pay claims, arguing that pandemics are excluded from policies. Now, everyone from the Houston Rockets to Chez Panisse are suing their insurers for refusing to pay claims.

Since the pandemic hit the United States this year, thousands of business owners like Mr. Gavrilides have discovered that the business interruption policies they bought, and have been paying thousands of dollars in annual premiums to sustain, won’t pay them a thing — just as they are struggling through the biggest business interruption in modern memory.

Now, many of them — from proprietors of gyms and dental practices to high-profile restaurateurs including the Chez Panisse owner Alice Waters, the owner of Cheers in Boston and even a National Basketball Association team — are taking their insurers to court, hoping to force them to cover some of the financial carnage. So far, more than 400 business interruption lawsuits have been filed, according to insurance lawyers.

“I think business interruption claims should be paid when business is interrupted,” Mr. Gavrilides said.
Insurance companies don’t see it that way. Most business interruption policies include highly specific language stating that for a claim to be paid out, there has to be “direct physical damage” — say, a flood that washes away a building or a fire that burns down inventory, forcing a business closure.

It’s hard to see how an insurance company could cover a pandemic, because the claims would so outnumber the premiums. We asked Dustin Furnari, Senior Vice President of HUB International, and he said: “With the exception of event cancellation policies, we haven’t seen positive results on business interruption claims being paid.   Typically, insurers underwrite based on a large spread of risk and paying minimal claims as they come up. They are not designed to cover a situation like a pandemic where everyone is experiencing a claim at the same time, much like terrorism risk insurance after 9/11. Insurers are going to defend themselves aggressively, as if one domino falls, it could lead to mass insurer insolvency.”

Kodak’s Wild Ride

In just six trading days, the share price of Eastman Kodak rose from $2 to as high as $60 before settling in in the mid-teens, following a disclosure that the company received a US government loan.

Kodak’s stock price first rose Monday, July 27, and then surged from $2 to as high as $60 over the following two sessions on an intraday basis thanks to the preliminary disclosure of a possible $765 million government loan to make drug ingredients at its U.S. factories. The stock then fell precipitously.

Driving the sudden swings was a series of events: early rumors of the deal on social media, a White House press conference touting the possible loan, stock option grants given to a Kodak executive as well as several board members and confusion over whether the deal was final. Kodak is under investigation by the Securities and Exchange Commission as well as congressional committees.

The volatility was the perfect environment for a wave of amateur investors who have become active day traders. These traders have plunged into Overstock.com Inc., Tesla Inc. and others on a belief the companies could weather the coronavirus pandemic better than competitors or more concretely profit from it.

Kodak is the most striking example yet of this trend. Its sudden rise and plummet offer a warning for investors who ignore company fundamentals and focus instead on a potential pandemic connection.

This chart shows the roller coaster last week. On July 24, only 74,900 shares were traded. The stock jumped about 20% last Monday with 1.6MM shares traded. By Wednesday, the shares climbed from 7.94 to as high as 60 while a whopping volume of 276MM.

The 8MM Skilled Nursing Relationship

Clark Street Capital’s Bank Asset Network (“BAN”) proudly presents: “The 8MM Skilled Nursing Relationship“. This exclusively offered portfolio is offered for sale by one institution (“Seller”). Highlights Include:

Files are scanned and available in a secure deal room and organized by credit, collateral, legal, and correspondence with Asset Summary Reports, financial statements, and collateral information. Based on the information presented, a buyer should be able to complete the vast majority of their due diligence remotely.

Event Date
Sale Annoucement Thursday, July 23, 2020
Due Dilligence Materials Available Online Monday, July 27, 2020
Indicative Bid Date Thursday, August 20, 2020
Closing Date Thursday, September 10, 2020

Please click here for more information on the portfolio. You will be able to execute the confidentiality agreement electronically.

The BAN Report: Credit Tightens / Consumer Credit Update / Retailers Use BK to Reject Leases / The Big Fight / Kodak’s Wild Ride / The 8MM Skilled Nursing Relationship-8/6/20

Credit Tightens

This week the Federal Reserve released its quarterly Senior Loan Officer Opinion Survey on Bank Lending Practices. Aside from residential real estate loans, both demand for credit lessened while underwriting standards tightened.

Regarding loans to businesses, respondents to the July survey indicated that, on balance, they tightened their standards and terms on commercial and industrial (C&I) loans to firms of all sizes. 2 Banks reported weaker demand for C&I loans from firms of all sizes. Meanwhile, banks tightened standards and reported weaker demand across all three major commercial real estate (CRE) loan categories—construction and land development loans, nonfarm nonresidential loans, and multifamily loans—over the second quarter of 2020.

For loans to households, banks tightened standards across all categories of residential real estate (RRE) loans and across all three consumer loan categories—credit card loans, auto loans, and other consumer loans—over the second quarter of 2020 on net. Banks reported stronger demand for all categories of RRE loans and weaker demand for all categories of consumer loans.

The second quarter represented the most dramatic tightening of credit since 2008-2009. For large and middle-market C&I loans, banks are reducing maximize loan sizes for credit lines, shortening maturities, increasing yields and fees, charging more for risk, tightening covenants, and increasing collateral requirements. The two highest reasons cited for tightening include a less favorable or more uncertain economic outlook and a worsening of industry-specific problems. For CRE loans, banks tightened even more as 81% tightened standards for C&D loans and 77% for CRE loans excluding multi-family.

On the mortgage side, both QM and non-QM jumbo loans saw the greatest amount of tightening, and some stopped originating jumbos completely. Essentially all consumer loan categories saw tightening and virtually no respondents lowered underwriting standards. Nevertheless, while the tightening of standards was noteworthy and comparable to 2008, lenders have not hit the brakes completely as they did in 2008. Credit is still available, albeit under more stringent terms and conditions. Lenders are also less eager to add new customers.

Credit card companies, for example, mailed out 57 million offers to consumers in June, a historic low and down from 272 million a year earlier, according to Mintel, a research firm that has been tracking the offers since 1999. Some banks have stopped offering the types of cards that attract people who may be focused on paying down debt.

JPMorgan Chase, for example, will make mortgages to new customers only with credit scores of 700 or more (up from 640) and down payments of 20 percent or higher. USAA has temporarily stopped writing jumbo loans, which are mortgages that are generally too large to be backed by the federal government, among other products. Bank of America said it had also tightened its underwriting, but declined to provide details.

All of this is responsible lending. Banks are responding prudently to a more challenging environment.

Consumer Credit Update

According to a creditcards.com survey, many consumers are poised to miss credit card payments within the next few months.

Sixty-two percent of those with credit card debt said they won’t be able to make minimum payments in the next three months if the pandemic continues, according to a CreditCards.com poll.

The new survey, conducted in mid-July, reveals 61% will be affected if they’re unable to work now or in the future, 56% if there is no more government stimulus money and 26% when the $600 weekly supplemental unemployment benefits end.

Millennials are the most concerned about being in debt – 87% said they won’t be able to make minimum payments if they’re unable to work, 79% won’t if COVID cases continue to surge, 72% if there’s no more government stimulus and 47% when the supplemental unemployment benefits end.

“So far, I have been pleasantly surprised how few people have fallen behind on their payments during the pandemic,” said CreditCards.com industry analyst Ted Rossman.

But he cautioned that these statistics have been aided by a tremendous number of government stimulus and lender hardship programs.

The lack of delinquencies to date may be artificial, and when the stimulus stops, the surge in delinquencies will have been delayed, not avoided.

“We need to stay tuned because Congress and the White House are currently working on another round of potential stimulus – this situation could change within the next couple weeks,” Rossman said.

It appears many consumers will run out of gas without additional government stimulus. But they have so far stayed largely afloat. For the seventh straight week, the share of mortgage loans in forbearance has declined to 7.67%.

The Mortgage Bankers Association’s (MBA) latest Forbearance and Call Volume Survey revealed that the total number of loans now in forbearance decreased by 7 basis points from 7.74% of servicers’ portfolio volume in the prior week to 7.67% as of July 26, 2020. According to MBA’s estimate, 3.8 million homeowners are in forbearance plans.

The share of Fannie Mae and Freddie Mac loans in forbearance dropped for the eighth week in a row to 5.41% – an 8-basis-point improvement. Ginnie Mae loans in forbearance increased by 1 basis point to 10.28%, and the forbearance share for portfolio loans and private-label securities (PLS) decreased by 16 basis points to 10.37%. The percentage of loans in forbearance for depository servicers dropped to 7.95%, while the percentage of loans in forbearance for independent mortgage bank (IMB) servicers decreased to 7.81%.

It appears the initial mortgage forbearance wave is behind us and more borrowers are coming off forbearance plans than beginning them. It remains to be seen what happens when this massive government stimulus wears off and the economy must stand on its own two feet.

Retailers Use BK to Reject Leases

25 major retailers have used the bankruptcy process to reject property leases, thus creating potential problems for their landlords and their lenders.

With the pandemic intensifying the plight of U.S. retailers, companies from J. Crew Group Inc. to the owner of Ann Taylor are using Chapter 11 bankruptcy filings to quickly get out of costly, long-term leases and shutter thousands of stores.

By seeking court protection, firms like Neiman Marcus Group Inc. and the parent company of Men’s Wearhouse avoid the headache of protracted negotiations with individual landlords. But the moves threaten to upend huge swaths of the real estate market and the half-trillion dollar market for commercial mortgage-backed securities.

“This is now black-letter law — a debtor can cram down a landlord,” said Melanie Cyganowski, a former bankruptcy judge who’s now a partner at law firm Otterbourg PC. “If this becomes a tsunami of retailers rejecting their leases, it’s going to trigger another part of the sea change — the mortgages held by the landlords.”

As bankrupt firms like J.C. Penney Co. and Brooks Brothers Group Inc. look to jettison leases, landlords are already feeling the consequences. CBL & Associates Properties Inc., owner of more than 100 shopping centers in the U.S., is preparing its own bankruptcy filing after rent collections cratered. And 16% of retail property loans bundled into CMBS were delinquent in July, according to research firm Trepp.

We asked a leading bankruptcy attorney about whether a landlord can do much to stop a tenant from rejecting a lease in bankruptcy. He opined:

“It’s very tough for a landlord to fight a lease rejection. It’s the debtor’s business judgment, to which the courts usually defer. And they are often packaged into ‘omnibus’ lease rejection motions where the debtor will reject dozens of leases at a time. Sometimes you will see skirmishes over when, exactly, the rejection is deemed effective (the debtor needs to pay post-petition, pre-rejection rent on a current basis, but can stop once rejection is effective).  Usually I will see the rejection being effective as of the date the motion is filed, and courts generally seem ok with that.”

In short, there is little a landlord can do to some their tenants from using bankruptcy to get out of their lease obligations.

The Big Fight

Insurance companies love to collect premiums but can be stingy in paying out claims. Many businesses thought they were covered for business interruption insurance due to COVID-19, but insurance companies have refused to pay claims, arguing that pandemics are excluded from policies. Now, everyone from the Houston Rockets to Chez Panisse are suing their insurers for refusing to pay claims.

Since the pandemic hit the United States this year, thousands of business owners like Mr. Gavrilides have discovered that the business interruption policies they bought, and have been paying thousands of dollars in annual premiums to sustain, won’t pay them a thing — just as they are struggling through the biggest business interruption in modern memory.

Now, many of them — from proprietors of gyms and dental practices to high-profile restaurateurs including the Chez Panisse owner Alice Waters, the owner of Cheers in Boston and even a National Basketball Association team — are taking their insurers to court, hoping to force them to cover some of the financial carnage. So far, more than 400 business interruption lawsuits have been filed, according to insurance lawyers.

“I think business interruption claims should be paid when business is interrupted,” Mr. Gavrilides said.
Insurance companies don’t see it that way. Most business interruption policies include highly specific language stating that for a claim to be paid out, there has to be “direct physical damage” — say, a flood that washes away a building or a fire that burns down inventory, forcing a business closure.

It’s hard to see how an insurance company could cover a pandemic, because the claims would so outnumber the premiums. We asked Dustin Furnari, Senior Vice President of HUB International, and he said: “With the exception of event cancellation policies, we haven’t seen positive results on business interruption claims being paid.   Typically, insurers underwrite based on a large spread of risk and paying minimal claims as they come up. They are not designed to cover a situation like a pandemic where everyone is experiencing a claim at the same time, much like terrorism risk insurance after 9/11. Insurers are going to defend themselves aggressively, as if one domino falls, it could lead to mass insurer insolvency.”

Kodak’s Wild Ride

In just six trading days, the share price of Eastman Kodak rose from $2 to as high as $60 before settling in in the mid-teens, following a disclosure that the company received a US government loan.

Kodak’s stock price first rose Monday, July 27, and then surged from $2 to as high as $60 over the following two sessions on an intraday basis thanks to the preliminary disclosure of a possible $765 million government loan to make drug ingredients at its U.S. factories. The stock then fell precipitously.

Driving the sudden swings was a series of events: early rumors of the deal on social media, a White House press conference touting the possible loan, stock option grants given to a Kodak executive as well as several board members and confusion over whether the deal was final. Kodak is under investigation by the Securities and Exchange Commission as well as congressional committees.

The volatility was the perfect environment for a wave of amateur investors who have become active day traders. These traders have plunged into Overstock.com Inc., Tesla Inc. and others on a belief the companies could weather the coronavirus pandemic better than competitors or more concretely profit from it.

Kodak is the most striking example yet of this trend. Its sudden rise and plummet offer a warning for investors who ignore company fundamentals and focus instead on a potential pandemic connection.

This chart shows the roller coaster last week. On July 24, only 74,900 shares were traded. The stock jumped about 20% last Monday with 1.6MM shares traded. By Wednesday, the shares climbed from 7.94 to as high as 60 while a whopping volume of 276MM.

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