Lenders Need to Social Distance from Bad Loans. Now.

Depending on how you count it, this is either my third or fourth recession leading or advising lending businesses.  Note that I say “is.”  We are in a recession right now and there is no doubt about it.  When the mortgage industry started to go south in 2007, we spent a lot of time talking about “contagion” and whether those issues would “infect” an otherwise perfectly healthy economy.  At that time, there was room for a good debate and I saw both sides of the issue.  What played out was a relatively slow train wreck where smart lenders had time to react.  Those that reacted appropriately saw real benefits over their peers.

“The loss of employment and economic activity we have already seen is going to run through the economy like, well, Novel Coronavirus."

That will not happen this time.  The loss of employment and economic activity we have already seen is going to run through the economy like, well, Novel Coronavirus.  Excuse the parallel, but it’s true in a lot of ways.  A lot of people have already been impacted through job loss.  Lenders don’t have the tools to tell who is personally impacted, and to what degree.  Credit bureaus don’t show oncoming delinquencies.  Even the most impacted hospitality workers, out of work and with little prospect of returning to work, are still due wages.  It’s like managing a pandemic without test kits.

So, what can you do?  Social distance; big time.  If you don’t need to be extending new credit right now, why are you?  Especially if you have an earning portfolio to live off of, cut back sharply on new originations to the safest spaces possible.  Treat your existing cases.  You need to increase resources in loss mitigating areas like line management, authorizations, collections, and recoveries.  Monitor the situation: lenders are flying blind right now.  Those that first understand how to judge good lending from bad in the new world will have a tremendous advantage.  Track the progress rigorously.

As a career data-based credit expert I can tell you one thing: don’t wait for data.  Once it is clear where this is going to go, it will be too late.  You will have been overwhelmed by adverse selection as the first movers shut off the sources of credit for risky borrowers.  Act now to protect yourself.  There will be plenty of time to optimize how to get back into the market later.  Flip your origination question from “what should I cut” to “who do I know that I can safely approve in these times.” 

And if I may be so bold, call AQN.  We have collectively managed many businesses through many downturns.  We are here as advisors, with backup analytic bandwidth, to help you navigate through this rapidly changing world as safely and predictably as is possible.  Those who minimize the damage in the coming downturn will be best positioned to win when the upswing comes.