For a while now the Mortgage Guy has been posting that our product shelf is about 20% of what it used to be. Further we’ve stated that underwriting requirements (credit standards) have been tightening on all types of mortgages and that this trend was spreading to credit cards and consumer debt. The Fed released a survey yesterday that documents these very disturbing trends.
Banks are raising their credit standards for mortgages, consumer loans and commercial real estate loans at a pace never seen in the 17-year history of the Fed’s quarterly survey of senior bank loan officers, the Fed said.
Plain-vanilla business loans were also much harder to obtain, the Fed said. Banks expect more delinquencies and charge offs for most types of loans to consumers and businesses, the survey said. Banks said they were tightening their lending standards in response to weaker economy, reduced tolerance of risk, and decreased liquidity in secondary markets.
Consequently, we’ve been urging our clients, both current and prospective, not to delay any financing activity that they have been contemplating. Such as refinancing to make budgets more manageable for the rough times ahead.
One of the biggest reasons for the current procrastination on borrower’s parts, is the prospect for even lower interest rates in the future. We feel this could be a trap. By waiting for lower rates, home values continue to decline and credit standards continue to tightened dramatically.
Any potential gain from lower interest rates can be more than offset by falling home values and tighter credit policies. Waiting for lower rates not only can make refinancing more expensive, it may make it impossible.
This is also from the Fed survey…
For consumers, banks are tightening up on all types of mortgages, not just subprime loans. And banks are less willing to approve consumer installment loans.
More than 80% of banks - the largest percentage ever — said they had tightened lending standards for commercial real estate loans in response to a weaker economy. Nearly 60% of the banks reported falling demand for commercial real estate loans, and 87% expect the quality of such loans already made to worsen.
Clearly the United States is entering a very severe and equally dangerous credit crunch. It started in subprime mortgages and spread to all types of mortgages and now it’s spreading to installment loans and credit cards. Credit card issuers have tightened their standards just like the mortgage lenders as evidenced by this article in the Wall Street Journal.
Big card issuers such as Citigroup Inc. are requiring higher credit scores before issuing new cards, particularly in states that have been hit hard by the housing downturn, including California, Arizona and Florida. Some lenders, including Bank of America Corp., are offering lower initial credit lines. Other lenders, such as Capital One Financial Corp., are limiting credit-line increases or reducing credit lines for existing customers if they see signs that they are suddenly applying for more credit or are having trouble paying down their balances. And many card issuers are raising late fees and other charges to help offset what they see as higher risk.
Also from the article, this synopsis of various credit card lender initiatives.
Naturally, for an economy that is already reaching recessionary levels, these developments prove to be quite serious. John Mauldin at Minyanville states the following about recessions and depressions.
I have long contended that a recession is a normal part of the business cycle, but it takes a major policy mistake by a government or central bank to create a depression.
The Mortgage Guy has maintained that this recession is due to systemic causes rather than cyclical causes. In our view this recession is being brought on by debt markets that are not functioning properly or at all.
We have criticized the Fed, the Treasury Department and politicians for focusing on monetary policy and stimulus packages as opposed to focusing on the dysfunctional credit markets. Lenders, at this point in time, cannot effectively securitize the loans they are originating thus they are cutting back and refusing to lend.
Monetary policy won’t work in this environment because with failing debt markets and banks refusing to lend, there is no way to get the cheap money that a loose monetary policy provides, to the people who need it most.
Could this be the “major policy mistake” that morphs this recession into a depression? We think it could be and history is our guide. Consider this snippet from Wiki on the Great Depression.
In the face of bad loans and worsening future prospects, banks became more conservative in lending money. They built up their capital reserves, which intensified the deflationary pressures. The vicious cycle developed, and the downward spiral accelerated. This kind of self-aggravating process may have turned a 1930 recession into a 1933 depression.
These parallels are much too close for comfort. What is even more disturbing, is that as I write this today, there is still a lack of attention to our malfunctioning credit markets. All of the initiatives put forth so far by Congress, the Fed and Treasury Department all focus elsewhere and we think this is a major mistake. Perhaps the mistake that transforms the current recession into a future depression.
We have a lot of rough sledding ahead. Will you be prepared or will you become a victim? Now is the time to take a hard look at your financial situation and to make adjustments accordingly. Your financial alternatives are shrinking everyday.
Just because you might be the proverbial AAA rated borrower, doesn’t mean you won’t be affected by this credit squeeze. I’ll close this post with how the Fed Survey illustrates this tightening of credit standards affects all borrowers.
More than half of the banks tightened their standards for prime mortgages, by far the highest percentage in the 17-year history of the survey. Seventy percent expected the quality of prime mortgages to worsen.
More than 80% of the banks tightened their standards for nontraditional loans, including jumbo loans and other loans that do not conform to standards set by Fannie Mae and Freddie Mac. A similar percentage expected more delinquencies.
For subprime mortgages, about 70% of banks that offer such loans had tightened their lending standards, but more than 90% of the banks responding to the survey said they do not offer any subprime loans.
About 60% of banks tightened their standards for home equity lines of credit.
Tags: Current Events, Finance & Economy, Mortgages // 1 Comment »
For those homeowners who still can, now is the time to take defensive measures. Home values are dropping at historic rates, lenders are tightening up underwriting requirements for the minority of mortgage products still left in the market place. Unemployment is rising. The stock market is falling.
The reasons for taking action right now are numerous. The case for an economic tsunami is real and frightening. But now is not the time to be the proverbial “deer in the headlights”. Negative developments are coming at us at break neck speed. Like a linebacker, homeowners need to read the play and react to it immediately.