Key Highlights

  • Goldman Sachs forecast 13% default rate last week
  • Moody’s forecast 14.4% default rate by end of March 2021 and to rise to 17.7% by April-May 2021
  • Moody’s forecast unemployment rate to jump to 8.7% in Q2 and 6%-7% in next three quarters

Black Knight data recently released indicated that nearly 3M households have already claimed forbearance. This is an increase of 1,496% households that stopped paying their loans in just six weeks.

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On top of this new reality, here are some gloomy forecasts as the US economy has skidded to a halt because of the coronavirus pandemic:

  • Moody’s is predicting that some 30% of Americans with home loans, approximately 15M households, could stop paying their mortgages if the economy remains shut through the summer or beyond
  • JP Morgan is already acting on its predictions of 30% of households NOT paying their mortgages by shutting down its net interest margin origination platform, getting out of new loans, getting out of HELOCs and raising qualifying loan standards
  • Goldman Sachs forecasting 13% default rate
  • Moody’s predicting 13.4% default rate by end of 2020, 14.4% by end of March 2021 and 17.7% by end of 2021
  • Bank of America is forecasting 9% default rate over 2020 and 21% cumulative when credit cycle turns.

In addition to these predictions, these financial juggernauts, as well as health experts, generally agree that nothing is certain about when the COVID pandemic will be contained and about how quickly economic activity will take off when things return to “normal.” Add plunging oil prices, off the charts unemployment rates, mounting recessionary conditions and the global economic downturn, little ease to base-line default forecasts in the next two quarters seems to make sense.

Both Goldman Sachs and Bank of America agree that “…financial distress will remain acute…” regardless of the Federal Reserve’s “bold” announcements to aid business sectors. Goldman said, “…We…continue to point to the severity of the economic downturn as the key driver of HY defaults…(and) the Fed’s expanded policy actions will not translate into material fundamental improvement for the weak HY balance sheets.”

Bank of America stated, “The Fed’s…announcements do nothing to address the ultimate credit risk – nonpayment, downgrades and fallen angels…” and that “…default rates are unlikely to reach their peak levels in the next 12 months, given their historical tendency to rise only gradually following a turn in a given credit cycle. Issuers generally have a runway to deal with maturities, revolver capacity to tap, covenants to waive, and levers to pull to preserve cash by cutting employment and capex.”



Thanks to ZeroHedge.

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