Borrowers still taking payment holidays on $90bn of loans at top US banks

Loans in forbearance at the largest US banks more than halved in the third quarter but remained elevated, underlining how the outlook for defaults remains murky eight months after the pandemic took hold.

Customers were still taking payment holidays on loans totalling $90bn at the end of September, regulatory filings from the top four lenders reveal, including an average of more than 5 per cent of all loans to individuals and small businesses.

The figure is down from $190bn at the end of June as lockdowns eased, the US economy improved, customers resumed payments and banks began to end voluntary forbearance schemes.

“It is positive in that it is coming down as quickly as it is,” said Marty Mosby, analyst at Vining Sparks. “The real issue is how far does it come down from here.”

Offering borrowers breathing space to recover from the pandemic has been a key part of the US policy response to the deepest recession in over a decade, most notably through the Cares Act in March, which mandated most mortgage and student lenders to offer payment holidays of up to 180 days to borrowers impacted by the crisis. 

But the payment holidays obscure the true state of banks’ loan books, and the losses they could ultimately face if borrowers default.

Bank bosses say that many US borrowers signed up for the schemes as a precaution so they could build a nest egg in case the economy worsened, making it harder to judge which borrowers would ultimately prove unable to pay.

Executives have repeatedly said customers are faring better than they expected, but they acknowledge a level of uncertainty about the outlook. JPMorgan Chase chief executive Jamie Dimon said his bank’s reserve for future loan losses could be as much as $10bn too high or $20bn too low.

The four largest US banks — Bank of America, Wells Fargo and Citigroup, along with JPMorgan — took more than $62bn of charges for future loan losses this year, mainly in the first two quarters.

Mr Mosby said that if loans in forbearance did not halve again by the end of the year, it could suggest that borrowers are struggling and banks might have another round of loan-loss charges in 2021. Borrowers’ 180 days of breathing space will have largely expired by December, he said, making fourth-quarter numbers the “really telling sign”.

The US unemployment rate has fallen from a peak of 14.7 per cent earlier this year but remains at 6.9 per cent. About 12m of the 22m jobs lost at the outset of the pandemic have been recovered.

Early distribution of a Covid-19 vaccine next year could transform the economic outlook and reduce loan delinquencies — a prospect that sent bank shares soaring this week.

But some finance executives fear that the outcome of last week’s presidential and congressional elections means a new round of fiscal stimulus could take longer and be smaller than hoped.

“If we get another $1tn or $2tn stimulus here in December, everything can kind of hold together and trend OK until we work through the summer and the vaccine,” said David Konrad, analyst at DA Davidson. “If we don’t get any stimulus, all bets are off.”

Consumer and small business loans accounted for almost 80 per cent of the $90bn still covered by forbearance measures on September 30, according to regulatory filings. An average of 5.5 per cent of those loan balances continued to be in forbearance programmes across the four banks at the end of September.

Those loans were heavily weighted towards residential mortgages, where forbearance is legally mandated for most US loans, and credit cards, where lenders have discretionary programmes.

Wells Fargo’s $46.3bn of loans in forbearance is the highest of any bank, but that includes a $19bn portfolio of loans where Wells is indemnified from losses, after buying those from the government-owned mortgage agency Ginnie Mae earlier this year.

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