Whatever you do, don’t look down.
You remember that maximally intense moment in every Road Runner versus Wile E. Coyote cartoon? When the Coyote is so focused on chasing the Road Runner that he’s gone beyond the edge of the cliff, but he does not yet realize it? And we all know that the Coyote will plunge to the ground as soon as he looks down.
That’s the way the stock market feels right now, as the tech-heavy Nasdaq and the large-cap S&P 500 index hit all-time highs this month.
I mean, like, Huh?
This, just as the COVID-recession data registers the largest quarterly economic contraction ever and the highest weekly unemployment filings ever. If we’d used our prophetic crystal balls to foresee these summer of 2020 data points back in January 2020, we’d have all sold our stock portfolios.
And we’d have all been wrong to do so.
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Because, alternatively, maybe the stock market is the Road Runner, and investors collectively understand something we do not grasp individually. Such as: The recession will be shallow, vaccine development and deployment will be fast, and hefty corporate profits are just around the corner. Maybe all is well? Beep beep!
Who knows? I know I don’t. That’s the great stock market mystery of the day.
There’s another huge mystery playing out underneath all that, but semi-invisibly. The stock market — Wall Street — is not the same as the real economy — Main Street. The real economy is bigger and harder to see on a day-to-day basis. So the question I keep puzzling over is whether on the consumer side we are all dead men walking.
I mean Main Street specifically, in terms of consumer credit. Mortgages, credit cards, rental payments, car payments, student loans and personal loans. I worry this is another Wile E. Coyote scenario. Like, what if we’re collectively already over the cliff? Just that nobody has happened to look down yet?
I’ll try to explain my fears.
I’ve watched several webinars of fintech executives this month (I know, I know, I need better hobbies). These are leaders of companies that make loans for cars, autos, homes and unsecured education loans, like LendingPoint, Customers Bank and Marcus by Goldman Sachs. The executives agree that traditional data and FICO scores from the consumer credit bureaus must be treated with a massive grain of salt in COVID-19 times. Unlike previous recessions, they report that consumer credit scores have actually gone up, claiming the average consumer FICO is up to 15 points higher.
This seems counterintuitive but has apparently happened for two main reasons.
First, under the CARES Act, which Congress passed in March, borrowers can request extensions or forbearance on their mortgages with no hit to their credit report. By law.
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In addition, banks and lenders have been aggressively pursuing the classic strategy of what’s known flippantly in the industry as “Extend and Pretend.” That means banks extend the payback terms of a loan, and then pretend (for both regulatory and portfolio-valuation purposes) that all is well with the loan.
For example, when I log onto my own mortgage lender’s website, there’s a button asking if I’d like to request a payment halt. The CARES Act allows for an automatic extension of almost all mortgages by six months, upon the borrower’s request.
Despite that potential relief, the Mortgage Bankers Association reported a second-quarter spike of 8.22 percent in delinquencies, up nearly 4 percent from the previous quarter.
Anecdotally, landlords I know report that while most of their renters are current on payments, between 10 and 25 percent have stopped paying full rent. The end of enhanced unemployment payments in July — that extra $600 per week that supported so many — will likely have an effect on folks’ ability to pay their rent or their mortgage. But the effects of that reduced income is probably only showing up this month.
The CARES Act also suspended interest accrual and all payments on federally subsidized student loans until Sept. 30. In August, President Trump extended the suspension to Dec. 31. Outstanding student loans are even bigger than the amount of credit card debt. Both loan markets are over $1 trillion.
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It seems every week that each of my credit card lenders offers me ways to pay less than the usually required amount, due to COVID-19. All of the fintech leaders said their companies spent April and May reaching out to existing customers offering one-month to six-month extensions or forbearance or easier payment terms. I assume that all of these “Extend and Pretend” measures explain why student loan and credit card delinquency rates have not noticeably increased this summer.
This is all nice, and probably good business, too. But it is not sustainable.
Main Street consumers have been given a huge temporary break on student loans, mortgages and credit cards. The beefed-up unemployment payments and direct payments from the U.S. Treasury have all also helped. Temporarily.
When these “extends” and “pretends” all run out in September, October and then December, are we all the Coyote past the cliff?
Michael Taylor is a columnist for the San Antonio Express-News and author of “The Financial Rules for New College Graduates.”
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