Mortgage delinquencies caused by the coronavirus will exceed Great Recession levels, according to this forecast

The coronavirus-fueled economic downturn is hitting homeowners hard. And the worst may be yet to come.

A new report from Oxford Economics estimates that 15% of homeowners will fall behind on their monthly mortgage payments. If that forecast comes to fruition, mortgage delinquencies caused by the coronavirus pandemic would exceed the number seen during the Great Recession. Back then, the peak delinquency rate was 10%.

Nearly 4 million homeowners are in the midst of forbearance plans, representing 7.54% of all mortgages, according to the latest data from the Mortgage Bankers Association, an industry trade group. When it comes to loans backed by Ginnie Mae, that figure increases to nearly 11% — these include Federal Housing Administration and Veteran Affairs loans.

Stimulus legislation signed by President Donald Trump allows any borrower with a federally-backed mortgage to request forbearance for up to 12 months, meaning the homeowner can skip or make reduced payments during that time.

Given the risk mortgage companies are facing right now, many lenders have imposed more stringent requirements for loan applicants. “The uncertainty in the mortgage market has contributed to a significant tightening of lending standards that may persist even once a recovery is underway,” Oxford Economics wrote.

Don’t miss:If you’re skipping your mortgage payments, watch out for this costly mistake

The pace of forbearance requests has slowed in recent weeks following April’s breakneck speed, but that could change, experts warned. “Although the pace of forbearance requests slowed this week, call volume picked up — which could be a sign that more borrowers are calling in to check their options now that May due dates have arrived,” Mike Fratantoni, chief economist at the Mortgage Bankers Association, said in the report.

Also see: These U.S. housing markets are most vulnerable to a coronavirus downturn

The tidal wave of forbearance requests and delinquent loans has put enormous strain on servicers, the companies that collect monthly payments and distribute them to the investors who own the loan including mortgage-backed securities.

Fannie Mae FNMA, -3.01% and Freddie Mac FMCC, -3.49% have taken steps to reduce the burden on servicers, which are still expected to forward payments onto investors for four months after a borrower has stopped paying or entered into a forbearance agreement.

One bit of good news for homeowners: While Oxford Economics said an uptick in foreclosures is “inevitable,” the wide availability of loan forbearance is expected to allow many people to stay in their homes.

Outside the Box: Are you a trader, speculator or investor? Ray Dalio and Jim Cramer weigh in on stocks

A young relative recently asked me if I thought it was a good idea to buy a certain stock, an airline. Its share price had fallen because of the pandemic.

“Well,” I told her, “Let me ask you a question first. Do you consider yourself an investor or a trader?”

I’m not sure of the difference, she replied. I said, “Well, a trader buys a stock with the idea of selling it for a profit, usually in a few weeks or months, at most a few years. An investor buys a company in order to own it for much, much longer, maybe forever.”

This FIRE couple was down $232,000 as of April 1. Here’s their plan

Most people say they are investors. But they tend to act like traders. There’s a huge difference.

I see this same conflict playing out across the actions of many young people. They know they must own stocks for their future security. The crisis seems to have created an opportunity to buy.

Some young investors do their buying through a smartphone app called Robinhood which allows for small purchases of stock with little effort. No knock on their business model; I’m all for getting people invested.

The app’s makers recently released the top trades on their platform for March, so it’s a neat data slice on how young investors are thinking at the moment.

Among those trades were a biotech that is working on a vaccine for the COVID-19, blue chips such as Ford Motor F, -5.22%, Disney DIS, -1.56%, Boeing BA, -2.92% and GE GE, -3.33%, the cruise line Carnival CCL, -7.14% and a cannabis stock.

It’s a “fantastic list,” commented CNBC personality Jim Cramer. “Not perfect, but very good for speculation.”

Cramer is absolutely right. What most people do on Robinhood is not investing. It’s not even trading. It’s speculation — buying on the short-term bet you can get out quickly with a win.

Is it wrong to buy shares that are beaten down? Of course not. But don’t confuse that with investing.

Ray Dalio, the investment guru who runs Bridgewater Associates, recently took to YouTube to try to shake some sense into investors tempted by what appear to be sudden stock bargains.

You’re outclassed from the start and don’t even realize it, Dalio warned.

“An investor must understand that they probably won’t be able to play the game well. You will not be able to decide how to move in and out of things,” Dalio said. “In order to be successful in the market, it’s more difficult than getting a gold medal in the Olympics.”

Normal people wouldn’t dream of getting up on a starting block alongside swimmers such as Michael Phelps or Katie Ledecky. Even world-class athletes would shudder at the thought. (Have you seen Ledecky lead her competitors by more than a pool length?)

“You wouldn’t think about competing in the Olympics, but everybody thinks they can compete in the markets,” Dalio said.

The problem is that there’s much more money competing in those trades than you realize. Hundreds of millions of dollars coming and going from these same stocks, Dalio points out.

He would know. His fund is among the biggest movers of such money. “The worst thing you can do is think you can time all these movements. I guarantee it’s a tough game to time,” he said.

In fact, he says, it’s likely that even experienced investors will get confused and do the opposite of what they should — and that quickly gets dangerous.

“The greatest mistake of all investors is to think that what has done well lately is a better investment rather than more expensive. And what has done worse lately is the worst investment — get me out of it! — rather than it’s cheap.”

“Unless you know how to deal with the differences of those, which most people don’t, they’re going to be in trouble,” Dalio says.

So what should investors do? First, Dalio says, diversify. “Diversify by company, by country, by currency.”

Second, yes, you should invest. Waiting is a real risk. “Cash is seductive, no volatility, but it taxes you about 2% a year” because of inflation, Dalio notes.

Burt Malkiel, the Princeton professor who wrote the investment classic “A Random Walk Down Wall Street,” had this advice in a recent opinion column for The Wall Street Journal. Malkiel serves on the investment committee of my firm.

Yes, buy stocks, but do it the smartest possible way: In careful steps. In addition to diversification using index funds, Malkiel says, buy into the market over time.

“There is no need to complete any reallocation all at once,” Malkiel writes. “By moving money into equities slowly over time, you will ‘dollar-cost average’ your reallocations and avoid the feeling of regret you could experience by reallocating equities at prices that could be well above the ultimate market bottom.”

Put another way, invest without trading and definitely steer clear of speculating. Where the market goes in 10 or 20 years is what matters, not what stock you choose today with an eye toward dumping tomorrow.

That direction, ultimately, is up. Instead of worrying about what to buy, focus instead on what you pay to do your investing. It’s almost certainly too much, and that cost often determines your performance over the years.

Revolution Investing: Small-cap stocks will continue to underperform as companies lack a lifeline

We’re back to a wildly volatile market for small-cap stocks as large companies get richer and smaller companies get the shaft.

The iShares Russell 2000 ETF  dropped 4% on Tuesday, and it’s tumbling again Wednesday.

People were amazed that the stock market had regained almost all its losses. However, the “stock market” doesn’t really exist….

Dispatches from a Pandemic: ‘It’s really the Wild West out there.’ Your trip to the dentist is about to get more painful — but not for the reason you might think

Dentists will likely be feeling the pain too during your next visit.

After losing over a month’s worth of revenue following guidelines from the Centers for Disease Control and Prevention to provide only emergency services, dentists are eager to see their patients again.

But doing so comes at a hefty cost.

To lure patients back and ensure his own safety as well as his staff’s, Anthony Ceccacci, a dentist and owner of Madison Avenue Smiles, a New York City-based dental practice, said he’s gone on a financial limb with scant guidance from health authorities.

For $85, he’s offering finger-stick antibody tests. He’s also asking all of his patients to rinse their mouths with iodine prior to being seen.

‘At this time, the ADA does not have a formal policy on antigen testing.’

— Matthew Messina, a Columbus, Ohio-based dentist who serves as a spokesperson for the American Dental Association

He’s spent nearly $35,000 on disinfectant equipment such as oral high-speed aerosol evacuation units, ozone generators and ultraviolet lights.

After donating masks and other forms of personal protective equipment (PPE) to frontline health-care workers in New York City, he’s now being priced out of N95 masks, surgical gowns, face shields and goggles which dentists are now required to wear per CDC guidelines.

On Tuesday, Republican Sen. Susan Collins from Maine voiced concerns from dentists in her state who have been unable to see patients, which she said “is causing growing health problems.” She asked Robert Redfield, head of the CDC, whether existing guidelines were adequate enough for dentists to return to work.

“We’ve been interacting and talking with dentists, and working with the state and local public-health physicians to update our guidelines on reopening a variety of medical services,” Redfield said during a Senate COVID-19 hearing held Tuesday. “We are in the process of updating those guidelines and they will include direct guidelines for dental practices.”

Aside from PPE and a one-page coronavirus screening questionnaire for patients, Ceccacci said, “It’s been crickets” from the New York State Dental Association as well as the American Dental Association. “The guidance from them has been so poor. They’ve given me no clear directive.”

“If I were to bring back my staff following their recommendation, how can I look them in the face and say they’ll be safe?” Ceccacci said.

‘If I were to bring back my staff following their recommendation, how can I look them in the face and say they’ll be safe?’

— Anthony Ceccacci, a dentist and owner of Madison Avenue Smiles, a New York City-based dental practice.

In a toolkit for interim reopening guidelines the ADA published in early May, there is no mention of the disinfecting equipment he bought or antibody testing.

“At this time, the ADA does not have a formal policy on antigen testing,” said Matthew Messina, a Columbus, Ohio-based dentist who serves as a spokesperson for the ADA.

“Dentists who I have spoken to are very appreciative of the guidance of the ADA, and their state and local dental associations during this pandemic,” he added.

That’s certainly not the case for Ceccacci, who has instead taken cues from Kwang-Bum Park, a well-known South Korean dentist who runs a multi-practice clinic based in the Daegu metropolitan area, the country’s coronavirus epicenter.

“South Korea has gone through it already,” Ceccacci said, which is why he looks to Park over the ADA. The ADA and the NYSDA, he added, are “all about protecting themselves.” He said they’re treading cautiously to avoid being criticized later. “I don’t blame them, but I didn’t expect any direct answers from them on how to reopen my office.”

In a tool kit for interim reopening guidelines the ADA published in early May, there is no mention of the disinfecting equipment he bought or antibody testing.

Anthony Ceccacci
The ADA and other dental associations rely on advice from the CDC

Last week, Chad Gehani, president of the ADA penned a letter to the CDC asking the agency to “quickly provide guidance on how to safely reopen dental practices during the deceleration phase of the COVID-19 outbreak.”

“The latest CDC guidance (of April 27) is still appropriate for those parts of the country where COVID-19 infection rates are accelerating or peaking,” the letter stated. “However, the situation is much different in areas where infection rates are now declining — and the risk(s) of acquiring or transmitting COVID-19 are very low. It is critical for dentists to have a new or revised guideline recognizing a risk-based approach.”

Chad Gehani, president of the ADA penned a letter to the CDC asking the agency to ‘quickly provide guidance on how to safely reopen dental practices during the deceleration phase of the COVID-19 outbreak.’

“The CDC appreciates the letter from the American Dental Association and is actively adjusting its response and guidance as conditions change and as we learn more about COVID-19,” said Kate Fowlie, a spokeswoman for the CDC.

“The CDC has been working recently on updating the COVID-19 guidance for dental settings in preparation for resuming care. We anticipate the updated guidance will be available soon.”

Although dentists in 31 states are allowed to reopen and perform elective procedures, the CDC recommends dentists only provide emergency services. As it stands, the agency does not have any published protocol on how to safely offer non-emergency services.

But for emergency care, the CDC says, “If a surgical mask and a full face shield are not available, do not perform any emergency dental care. Refer the patient to a clinician who has the appropriate PPE.”

Anthony Ceccacci, a dentist and owner of Madison Avenue Smiles, a New York City-based dental practice.

Anthony Ceccacci
Reputations are on the line

During the AIDs crisis, Ceccacci said dentists had “a bad runup” and were seen by some people as a mechanism for transmitting the deadly disease.

Recalling a story published in The New York Times in 1993 regarding a Florida dentist who allegedly had unintentionally caused six of his patients to contract AIDS, Ceccacci said, “I don’t want to be that guy.”

During the AIDs crisis, Ceccacci were seen by some people as a mechanism for transmitting the deadly disease, helped by a 1993 story in The New York Times.

To avoid that, he’s gone above and beyond in terms of preparing his office to see patients next month, assuming that New York Gov. Andrew Cuomo, a Democrat, doesn’t issue new guidance that would push back the date.

“I’ve always considered every patient as a potential for disease, but coronavirus has taken it to the next level,” Ceccacci added. “We’ve just enhanced our office’s protocol because of the patient’s fear and anxiety. If they don’t see us donned in hazmat suits, they’ll think they’re not safe.”

“I have invested a lifetime in this multimillion-dollar practice, if I lost it have no idea what my next career would be.”

Similarly, Jeremy Peyser, a dentist based in New York City, recognizes that one allegation of a patient contacting COVID-19 from visiting him could be fatal for his practice.

That’s why he stopped seeing patients in early March when one of his employees called in sick. She said she had a fever, and Peyser encouraged her to get a coronavirus test, but at the time, such tests were not available unless you were in an at-risk category or had recently visited a COVID-19 hot spot.

Jeremy Peyser, a New York City-based dentist, says that one allegation of a patient contacting COVID-19 from visiting him could be fatal for his practice.

Since then, he has only been seeing patients who need emergency care. But he won’t just see any patient. “It has to be someone I know and have seen personally,” he said. “If I don’t really know them how would I know if they’re practicing social distancing?”

Unlike Ceccacci, Peyser has held off on purchasing new disinfecting equipment until the ADA or CDC share “what works and what doesn’t work” in terms of killing coronavirus, he said.

In the meantime he’s been relying on a Whatsapp FB, -3.29% group composed of New York City-based periodontists, oral surgeons and general dentists like himself.

Members of the group share new information, especially concerning protocol for reopening their offices, disinfecting equipment and the CARES Act’s Paycheck Protection Program.

Like the 12 other people in the chat, Peyser was not able to obtain a PPP loan in the first round. In the second round he was approved for a $44,000 loan which made it possible for him to bring back staff he had to furlough.

The group chat has also been a forum for industry experts to share their own insights on how to safely reopen and discuss new equipment. They take care to distinguish between opinion and facts when sharing information. He adds, “My opinion can only be so helpful.”

Michael Scialabba, vice president of clinical affairs for 42 North Dental, a New England-based dental-service organization.

‘It’s really the Wild West out there’

Before coronavirus, Michael Scialabba, rarely worried about having enough gloves and masks for all 260 clinicians across 76 different dental practices he oversees as vice president of clinical affairs for 42 North Dental, a New England-based dental-service organization.

He simply placed an order with the same wholesale supplier. Occasionally, shipments would come in late or get lost in the shuffle. But when more patients were admitted to hospitals due to coronavirus in mid-March, his supplier told him that they couldn’t sell anything to him and that everything “was going to hospitals.”

‘When you have to buy from multiple suppliers and you don’t have a relationship with them you’re low on the totem pole.’

— Michael Scialabba, vice president of clinical affairs for 42 North Dental, a New England-based dental-service organization

At that time, all 76 locations had enough surgical masks to get by, but then the CDC recommended dentists wear N95 masks even for patients that don’t display coronavirus symptoms.

Suppliers placed limits on how many masks one customer could buy, which was far less than “what you would need in order to see patients,” Scialabba said.

Instead of having just one supplier, he’s buying from over six. There’s also no guarantee that the masks and other PPE will make it to his office, Scialabba added. He also worries that delivery drivers will end up keeping the masks for themselves.

If that happens, he said it would be nearly impossible to get refunded. Compounding the problem: He’s paying more for gowns, face shields, gloves and masks than before.

“When you have to buy from multiple suppliers and you don’t have a relationship with them you’re low on the totem pole,” Scialabba said. “It’s really the Wild West out there.”

Prior to the pandemic he said an N95 mask cost $1.50. And now? He’s paying $12 per mask. What’s more, gowns that “used to cost pennies” are now going for $4 to $6.

‘Dental practices need to return to full essential service, not just emergency services, for the health of the public.’

— Mark Feldman, executive director of the New York State Dental Association.

“Most of our offices haven’t been open for eight weeks, so we’ve had no capital inflow,” Scialabba added. Despite that, he’s paying $8,000 to $10,000 more on PPE per office.

Peyser and Ceccacci are facing the same problem.

In addition, Peyser said that the suppliers he’s in touch with “can’t even guarantee me a price because they don’t know how much they’re going to have to pay for inputs on their end.”

Both donated PPE to frontline health care workers in New York City and are now being priced out of PPE.

“Dental practices need to return to full essential service, not just emergency services, for the health of the public,” said Mark Feldman, executive director of the NYSDA.

But when it comes to obtaining affordable PPE, the organization said it has “no comment at this time.”

To afford these premiums, Scialabba has advocated for a new insurance code to bill for infection-control fees, which the ADA signed off on.

Now he’s able to charge some patients an additional $10 per visit given that not all insurance companies are on board. While this hardly covers the full cost of PPE especially when a patient needs to see multiple providers, “it helps mitigate the cost and show that we’re all in this together.”

Ultimately, Scialabba is worried about patients who stop going to the dentist altogether.

“That’s the last thing I want to see,” he said. “This could easily cause an oral health crisis if everyone stops seeing their dentists.”

Mark Hulbert: Here’s one way market-battered retirees can sleep better

Did retirees and soon-to-be-retirees suffer in vain during the February-March waterfall decline?

I’m referring to their having to endure the COVID-19-induced bear market, which caused the S&P 500 SPX, -2.05% to drop by 34% from its February high. The almost-universal advice during that plunge was that we ignore it and hold on for the long term.

But did we really need to suffer that many sleepless nights? Few stop to ask, since this advice is so widely accepted as gospel. In this column I nevertheless ask this perhaps sacrilegious question.

The inspiration to challenge to conventional wisdom comes from a major academic study that appeared a year ago in the Journal of Financial Economics by finance professors Alan Moreira of the University of Rochester and Tyler Muir of UCLA. They found that investors can increase their long-term returns by as much as 2% annually by reducing their equity exposure whenever volatility starts to rise—and only increasing it again once volatility starts to come back down.

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What a revelation. For years we were told that our emotions are our worst enemies, and that we need to resist the urge to sell when volatility spikes. This new research suggests the opposite: That—at least in this regard—our emotional urges lead us in the right direction.

Moreira, in a recent interview, explained how this approach might work: At the end of each month, compare the volatility of the stock market’s daily changes in that month to what it was in the preceding calendar month. If it’s higher, then reduce your equity exposure in the subsequent month. And if it’s lower, increase your exposure. (For a simple short cut, he said, you can focus on the VIX VIX, +7.47% ; comparing its month-end level to what it was at the end of the previous month.)

Moreira said that a rule of thumb he thinks is appropriate for long-term investors is to have a default equity allocation of around 80%, which is high but not so high as to stand in the way of increasing it even more should volatility decrease sufficiently. At the beginning of this year, he said, this portfolio’s equity allocation was close to this default, but was already much lower than that by the time March rolled around. It thereby sidestepped the bulk of the bear market.

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For example, this portfolio’s equity allocation would have been lower in February than in January, since volatility increased in January—from a VIX of 13.78 at the end of December to 18.84 at the end of January. It would have been lower still in March since the VIX jumped to 40.11 by the end of February. And it would have been still lower in April, since the VIX closed March (at 53.54) even higher than February’s month-end reading.

This hypothetical portfolio never goes short the market, or even to 100% cash. But at its lowest point earlier this year, Moreira said, this portfolio’s equity allocation was around 10%. If retirees and soon-to-be-retirees had been following this portfolio allocation, they would have slept a lot more easily through the dark days of March.

Note carefully that if you follow this strategy outside of your tax-deferred retirement accounts there will be tax consequences for the short-term trades. So long as you utilize it in tax-deferred accounts, however, that is not a concern.

Read: Retirement savers have been following generic financial advice — and that’s a good thing right now

Why volatility timing works

You may wonder how it can be that generations of academic researchers and financial planners missed the potential of volatility-managed portfolios. Moreira believes it traces to a failure to distinguish between spikes in volatility, which are short-lived, and increases in the market’s long-term potential, which are longer-lived. Because of this difference, he and his co-researcher write, “investors can avoid the short-term increase in volatility by first reducing their exposure to equities when volatility initially increases, and capture the increase in expected returns by coming back to the market as volatility comes down.”

I note in this regard that volatility has come down from its record levels in March. At the end of April, for example, the VIX was 36% lower than where it stood at the end of March. Followers of Moreira’s research therefore would have increased their equity exposure at the beginning of May. They wouldn’t have increased it all the way back to the default allocation of 80%, but at least they would have begun the process of tiptoeing back into the market.

This part of the volatility strategy may be more difficult to execute from an emotional point of view, since the tendency after a market crash is to stay away from the market for longer than is warranted. But the strategy’s long-term potential requires that you nevertheless do so.

If you don’t have the discipline to do that, then you shouldn’t bother, sticking instead with your previous long-term buy-and-hold strategy.

Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. Hulbert can be reached at mark@hulbertratings.com.