Question

What is default and foreclosure and how should lenders adjust policies due to the Covid 19 crisis. How would your response impact the profit/loss for the lender and thus ultimately the stockholders.

Answer 1

As soon a borrower fails to make a loan or mortgage payment on time, it is called default in payment and the foreclosure process begins when a borrower defaults a loan or mortgage payment. In foreclosure process, a lender takes control of a property, evicts the homeowner and sells the home.

But the ongoing spread of the COVID-19 is having widespread impact on the financial industry and those that rely on products and services provided by banks, other lenders and services providers. These crisis could potentially serve as the basis for a lender to refuse to make a loan or refuse to fund further advances or serve as the basis for a lender to declare an event of default under existing loans. But as the spread of COVID-19 across the globe has created immediate and dynamic concerns for the financial sector, lenders must adjust their policies considering that we are in a fluid and rapidly evolving environment and that many of their clients are in the process of adjusting their own internal policies and procedures to address these unprecedented circumstances and guard against reputational damage. Policies formulated may contain

Continuing advances on lines of credit- Under what circumstances can a lender stop advancing under a material adverse change or other loan provision?

Non-monetary defaults- At what point should you declare a non-monetary default based on a financial covenant?

Force majeure- loan documents contain a force majeure provision that may excuse a party affected due to Covid 19 crisis from performing its contractual obligations that become impossible or impracticable, etc.

Due to the crisis lenders have now put some of their retail loan collections on hold. Banks are also recommended to host relaxations in repayment of loans and to provide other reliefs such as in classifying accounts as non-performing assets. Due to such a huge economic damages NPA will rise, lenders would feel risky to provide loans to corporate which will either increse interest rate to cope with default or may decrease availaibility of fung, causing  heavy losses to lenders and thus ultimately to the stockholders