We believe the American consumer has come through the pandemic in surprisingly good shape—at least until now. The resilience of the economy, government stimulus checks and an elevated savings rate have allowed people to keep up with their payments on car loans, student loans and credit card bills. But we are starting to hear from lenders that lower-income borrowers are struggling. These borrowers have exhausted their savings and unemployment benefits are coming to an end for many in December. As a result, delinquencies have begun ticking up. Without additional federal help or some improvement in the economy, the situation could deteriorate in the coming months. We are watching all developments closely for the impact they could have on the asset-backed securities market.

How we got here

The US economy shrank dramatically in the second quarter and most forecasters expected a slow recovery. Instead, the US bounced back sharply in the third quarter. A number of factors contributed to the rebound. Many businesses quickly figured out how to operate remotely and allow non-essential employees to work from home. The government stimulus—legislation that gave more than $2 trillion to individuals and businesses—did its job. And the savings rate soared, in part because there were fewer places for Americans to spend their money. For lenders, the impact was easy to see: consumers kept current on their payments to a degree few anticipated. More recently, we are seeing indications that the recovery may be losing steam. Weekly jobless claims in early December hit their highest level since September as a surge in COVID-19 cases forced governors and mayors to impose new restrictions. Congress has yet to agree on a new relief package. We believe the fate of that package will be critical to lower-income Americans, whose finances may already be stretched to the breaking point.

A K-shaped recovery

The COVID-19-induced downturn has imposed a disproportionate burden on those at the lower end of the income spectrum in our view. These people are more likely to have lost their jobs because of damage done to industries like hotels and restaurants, and are less likely to have had savings to fall back on. The cash from the earlier stimulus has tided them over until now, but lenders are hearing from these borrowers that the cash cushion is gone. Other forms of support are also disappearing. Temporary moratoriums on rent and student loans are set to expire soon. Lenders, who have granted payment extensions, are also bumping up against the limit of the support they can provide. Seasonal factors aren’t helping. Typically at this time of year people focus more on holiday spending than on paying bills. The upshot: some borrowers are saying that unless there is a new stimulus package, they will be unable to make good on their obligations.