🔒CT lenders show customer solidarity during pandemic, but worries linger

Connecticut’s sixth largest bank offers a window into what lenders here may be facing in the months ahead, as the COVID-19 coronavirus severely impacts the lives and operations of many business and consumer borrowers.

At Naugatuck-based Ion Bank, CEO David Rotatori says borrowers representing about $90 million in loan balances have come forward to ask for loan modifications as they struggle from the financial fallout of the virus.

That’s about 10% of Ion’s entire book of Connecticut loans, and the ratio is only going to rise — perhaps to as high as 30% — as the outbreak continues to sideline businesses and workers.

Like Ion, many Connecticut banks and credit unions have been eager to play a benevolent role in the ongoing coronavirus pandemic, waiving late charges and other fees, launching low-interest emergency lines of credit and working with borrowers to modify loans or delay payments.

That spirit of solidarity culminated in a March 31, pact signed by 60-plus lenders pledging to offer up to three months of mortgage relief for homeowners who have been impacted by the crisis.

“Financial institutions have been working proactively with borrowers right from the get-go,” said Thomas S. Mongellow, president and CEO of the Connecticut Bankers Association.

“If we do our job right, we’re going to keep everybody financially secure,” said Bruce Adams, CEO of the Connecticut Credit Union League.

That flexibility, however, can’t last forever. The longer Connecticut’s economy is in partial quarantine, the greater risk that borrower accommodations could eventually stress institutions’ financial strength.

The federal government’s $2-trillion stimulus package, which includes low-interest loans for employers that maintain their payrolls through the crisis, as well as modest checks for consumers, should help many bank and credit union customers meet some of their short-term financial obligations, though S&P Global says it won’t be enough to stave off a recession, the length of which is anybody’s guess.

If the stimulus doesn’t provide the desired economic shot in the arm, or if COVID-19 hangs around late into the year or longer, some wonder how many more bullets Congress might have in the chamber. At some point, lenders may have to tighten their standards in order to protect their own financial health.

“It’s one thing to not have earnings, it’s another to start taking [loan] losses where we start to eat into the capital,” said Rotatori, whose bank has $1.36 billion in assets. “I think the government can support two to three months, but if it goes to six, eight, 10 months or a year, at some point you’re going to have serious issues. There’s only so much the government can pump in.”

Rotatori said he’s calm about the situation for now because his bank is well capitalized, and even though he could be facing losses for the year, his largest borrowers are relatively strong.

Stimulus demand

In the coming weeks, banks (and some credit unions) will play a central role in connecting small businesses with approximately $350 billion worth of emergency loans backed by the U.S. Small Business Administration, assistance that was created in the recently signed federal stimulus package.

Demand will be very high, judging from Rotatori’s initial experience with borrower outreach as well as the state Department of Economic and Community Development’s new bridge loan program being almost instantly oversubscribed by cashflow-hungry employers trying to make payroll.

Rotatori, who said Ion’s March loan delinquency rate spiked about three-fold, and other industry experts expect to see the small business stimulus funding wiped out within one week’s time. The industry is hoping Congress increases the size of the lending pot in the near future.

In general, banks and credit unions have money to lend and they’re not pulling back.

“I think right now, we’re status quo, we’re not constricting lending at all,” said Duane Crisco, CEO of Windsor Locks-based 360 Federal Credit Union, which has 18,043 members and $234.2 million in assets. “It’s about understanding what’s being offered to small businesses and individuals, and we can help supplement that with payment deferrals or lower-rate loans.”

Mortgage relief

Signatories to the recent state mortgage-relief pact announced by the Lamont administration have pledged to provide up to three months of forbearance to mortgagees who attest they’ve been financially impacted by the COVID-19 crisis.

The process is envisioned to be simple, without many hoops to jump through, Banking Commissioner Jorge Perez said.

Participants have also agreed to not initiate new foreclosures for two months.

Institutions and regulators are urging borrowers who need help to be proactive and reach out to their lender or loan servicer as quickly as possible.

The voluntary program is sure to help many homeowners in the coming months, but it comes with a few caveats.

One is that it does not apply to mortgages controlled by federal entities like Fannie Mae and Freddie Mac, which own a majority of Connecticut home loans.

The federally backed programs have issued their own payment forbearance offerings, which range from two months to as long as a full year, depending on the situation.

Those seeking help may be required to deposit their mortgage insurance premiums and property tax payments into an escrow account. Those costs can be a sizable chunk of a monthly mortgage payment, and could weaken some of the relief lenders are offering.

Gnawing at the mind

Bank and credit union CEOs are mostly putting on an optimistic face, choosing to believe that the government will get COVID-19 under control, but press almost any of them just a bit, and they’ll share their doubts and fears about the coming months.

In addition to expressing concern about the health and safety of their workers and customers, they say the speed of the recovery will matter greatly.

“I think a long tail on this public health crisis would create a much more difficult financial climate going forward,” said the Credit Union League’s Adams.

His banking counterpart Mongellow agrees.

“The duration will dictate how severe the economic consequences might be,” Mongellow said.

Just how long the recovery takes could hinge on the extent to which the coronavirus pandemic is brought to heel, or not, in the weeks and months ahead, and there are challenges aplenty posed by a shortage of testing kits and personal protective gear.

“I think we have to prepare for months, not weeks, in terms of our approach with individual members and business members,” 360 Federal’s Crisco said.

There are also questions about how well the stimulus will work.

“I’m not going to say it’s going to prevent a recession, because I think we’re probably in a recession already today, we just don’t have the numbers to show it,” said Ion Bank’s Rotatori. “But if the money flows quickly, it will blunt the impact.”

Ion expects to see its mortgage business and auto lending decline, at least temporarily, as it continues to shift more of its focus to commercial lending.

North Haven-based Connex Credit Union CEO Frank Mancini is also anticipating the housing market — a key segment for many lenders — to go through doldrums over the coming months.

“You’re going to have a hard time finding people going out shopping for houses, I think,” Mancini said. “[Sellers] don’t want people going through their house.”

Then there’s a question upon which some are trying not to dwell: What if COVID-19 comes back before a vaccine is ready, wreaking further economic and human harm and forcing another round of social distancing?

It’s an unsettling prospect, Adams said.

“If we woke up and COVID was gone, and everyone knew it, we could confidently put the pieces back together,” he said. “But if we don’t know that the specter is gone, we might keep our money on the sideline.”