Why Covid-19 Mortgage and Credit Deferrals Shouldn’t Affect Your Credit Rating: Lessons From First World Economies

Covid-19’s Economic Impact or fallout

Nearly everyone has taken some beating or heat from the economic slowdown occasioned by the Covid-19 pandemic. The restrictions put in place by governments to curb its spread have had far-reaching effects on people’s livelihoods. Either, jobs have been completely lost or working hours and earnings cut considerably leading to reduced incomes-a phenomenon also known as economic recession/downturn/slump in economic slang if mild and short-lived. Otherwise, it is referred to as economic depression if extremely severe and prolonged. 

The financial industry or markets have been deeply negatively impacted ever since the coronavirus, the virus that causes the Covid-19 illness was first discovered in the Chinese city of Wuhan in October, 2019. If you were servicing a credit facility whether a mortgage or a personal loan, you couldn’t help but default on this key obligation once the lockdown measures meant to curb the spread of the virus were put in place as you either lost your job, working hours or even took a pay cut. 

Biased financial legal or regulatory framework

Such has been the sorry state of affairs for those with mortgages or other forms of loans to service. Yet the effects of such a fallout have hit people in poor countries like Kenya more or the hardest. This is so because Kenya a developing country, unlike countries in the rich world lacks a well developed legal or regulatory framework meant to cushion debtors from the severe effects of this aftermath. 

Needless then to say that either by design or default our financial or banking regulations are largely amiable, advantageous or biased in favour of the big financial actors while detrimental and exploitative to the consumers unlike the case with the developed world where the consumers or customers are for the most part insured against such unanticipated, sudden and emergent setbacks.

In other words, the balance is tilted in the lenders’ favour and the privileged boys and girls of the ‘Kenyan Wall Street’ have been laughing all the way to the bank as those servicing loans become irredeemably distressed and troubled as they lose their jobs and incomes and hence default on their credit servicing obligations while the banks add salt to their injuries through endless reminder phone calls and letter after letter which in most cases are underpinned by ultimatums, threatening and intimidatory tones.       

Time to overhaul or reform the existing financial legal or regulatory framework

Suffice then to that it’s time the government and the banking sector become more sensitive to the needs and interests of the people by putting in place a sort of a win-win situation or measures for both the financial markets and and the consumers of their services especially during unforeseen or even beforehand emergencies and catastrophes. In other words, making the financial markets work for the public or the consumers by removing the underlying failures of the financial markets.  

The United States and Australia stand out among the countries that have taken commendable measures in ensuring that their people are not unnecessarily depressed by their financial obligations as they first worry and grapple with the Covid-19 crisis. There are a myriad of effective financial best practices that our financial markets could and should learn from the two first world economies where the interests of the public especially during these unforeseen cum unusual times. 

Buying home a is considered a key achievement

Now many people the world over, consider buying a home a key achievement and many a time it forms the largest chunk of expenditure on peoples’ monthly incomes. Australians like the rest of humanity have not been spared the perils of the Covid-19 economic fallout. The livelihoods of many have been imperiled and as a result, people have had to defer their mortgage repayments. 

Many people are thus stressed about their finances but the good news is that their credit rating has not been negatively affected by deferrals or defaults owing to a progressive, financial regulatory framework that is in tandem with peoples needs and capacities in times of disaster that has been conceived and put in place by the government in conjunction with the Australian Banking Association.

Some key lessons from Australia

In an interview with the Australian Broadcasting Corporation, Ann Bligh the CEO of Australian Banking Association, explains that the Australian government and the financial industry made a concerted effort and moved with speed to ensure people could afford mortgage deferrals without hurting their credit scores in the wake of the Covid-19 outbreak.

‘’[Some] governments moved very quickly to ensure people could defer their mortgages. [Thus] talk to your bank about your circumstances. Your are entitled to a deferral of up to six months. Banks are required by law to report your credit history to the various credit rating agencies or bureaus. To ensure you don’t unjustifiably score negatively on your credit ratings, simply contact your bank and explain your case,” she observes. 

She goes on to explain that mortgage deferrals authorised by banks have a positive effect on your credit rating. “ Banks will record ‘0’ on your credit report meaning that it is as if you are still making payments. That is, you will effectively be recorded as if you are making payments because you are doing this in conjunction and agreement with you bank,’’ she further urges.

And whereas our banks would have us believe that the world would come tumbling down before them if they adopted large scale deferrals, the CEO offers a contrasting and insightful perspective noting that banks are well suited to manage large scale crises such as the Covid-19 pandemic while again resilient enough to absorb the resultant economic shocks. 

The Biggest financial crisis ever 

‘’This is the biggest financial crisis some people have ever experienced. So this is not the time for keeping the conversation to yourself. It is the time for reaching out. Banks can handle the situation. Banks are used to working with people in financial distress even in normal circumstances. Besides, banks have capital buffers that can help them withstand economic shocks while also acting as  shock absorbers for economies,’’ she points out.

Incidentally, Australian banks have the biggest capital buffers in the world. Any wonder then that they lead the pack in offering their customers such generous extensions or holidays for mortgage repayments? As the timeless swahili saying goes: Ukiona vyaelea, vimeundwa. See translation: Things don’t just happen. They are made so through sheer hard work, great mindset and persistent effort. 

The CEO’s overriding theme is: ‘’Have the conversation with your bank regardless of the circumstances. A deferral on your mortgage is your right provided you open up and prosecute your case with your bank.” 

How The US is handling the financial crisis

Further afield on the other side of the Pacific, Fannie Mae and Freddie Mac are offering timely assistance to homeowners who are financially distraught and overwhelmed by the Covid-19 pandemic. The Federal Government (the equivalent of Kenya’s national government) has also been at the forefront to help its citizenry enjoy the benefits of deferrals not only with mortgages but also with other types of credit facilities. For instance, the Congress (the US Parliament a bicameral legislature consisting of the House of Representatives the lower chamber which is popularly known as the House and the Senate the upper chamber) recently passed the CARES ACT to help students defer their loan repayments. 

Some state governments (the equivalents of Kenya’s county governments) have also passed quite a number of deferral pieces of legislation to address the financial distress created by the pandemic. 

A glimmer of hope as some Kenyan banks are assisting their clients 

However, all is not lost with the case of the Kenyan banking industry. The economic fallout of the Covid-19 crisis means that Kenyans are also having overwhelming financial difficulties and they as a consequence can’t keep up with their loan repayments especially mortgages. As a result, state authorities are working with the financial markets to ensure debtors experiencing financial hardship due to Covid-19 crisis are placed under forbearance programs or rather offered moratoriums on their credit repayments. 

Indeed, owing to their strong balance sheets, some financial institutions are taking cue from the rich world and are doing a fine job to assist their creditors pull through during this pandemic. The Kenya Commercial Bank is for instance offering support to its clients by suspending mortgage and personal loans repayments for a period or by extending the repayment period on the same by one year. So too has Absa Bank with regard to personal and business loans. 

There is much more to be done

Nevertheless, while such efforts are welcome and largely commendable, such efforts are mere drops in the ocean hence the need to cast the net wider and ensure these efforts cut across a broad spectrum of the financial players to bring many debtors on the fold. For a start, we could look no further than the developed world and assess how best we could adopt their sound financial regulatory and legal framework or rather adapt and tailor our existing one to ensure it is best suited to to cater for the needs, rights and capacities of the public in times full-blown crises like the obtaining Covid-19.  

Conclusion 

Kenya’s financial market also needs to be considerate, conscientious and sensitive to the public’s plight like its counterparts in the developed world especially during crises and emergencies such as the Covid-19 outbreak among others as opposed to being seemingly sadistic, greedy, acquisitive, uncaring, indifferent and apathetic to their very benefactors. 

The playing field desperately needs to be levelled to ensure that clients are not left to their own devices or under the mercies of calamities like the existing Covid-19 pandemic when tragedy hits mankind.

There are some best practices from the developed world and in particular the United States and Australia that we can learn and either adopt verbatim or make use of to tailor ours in order to suit the public’s needs and interests.     

Some key facts

  • Deferral/forbearance is a temporary postponement of mortgage payments granted by the lender or creditor in lieu of forcing a property into foreclosure. Loan owners and loan insurers may be willing to negotiate forbearance options because the losses generated by property foreclosure typically falls on them. Forbearance can also occur with other loans such as the case with student loans in the US.
  • The terms of a forbearance agreement are negotiated or entered between the borrower and the lender.
  • The borrower must demonstrate the cause for repayment postponement such as financial difficulties associated with a major illness or the loss of a job.  
  • According to EQUIFAX, deferred payments-many agreed as part of Covid-19 relief programs don’t harm borrowers credit scores. However, it is important to make sure that these deferred payments are reported correctly to credit bureaus, because even one false late payment can drop a credit score by as much as 150 points.
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