A Jonesboro loan officer said regulations for home buying have since changed. Credit scores now need to be higher to make larger purchases.

“The tough situation that we’re running into is that they’ve raised the credit score guidelines where you used to could have low 600 credit score where now it’s mid 700’s or you’re going to have a tough time getting a mortgage loan,” said Bandi. “Where we used to could see a moderate credit score, now you have to have a great credit score and great people are having a hard time getting loans, even with great scores because of the guidelines.”

Wilcox said the Jonesboro area has been in an economic advantage over the last few years.

“Across the country, there are 4 big markets that crashed hard, and everybody has kind of related that back to us and we have in the last year felt a slow down, but we haven’t felt it like everywhere else has,” said Wilcox.

When asked if the housing market could fall again, Bandi said as long as lenders make responsible decision, then the market should remain stabilized.

“A year ago, you could be self employed and as long as you got a great credit score, you could get a loan and now that’s not the case. I mean now even with a great credit score, you have to have a great job, a two year history as far as your job goes and there are just a lot of new requirements and it’s gotten a lot tougher,” said Bandi.

Source: KAIT 8, Jonesboro AR

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photo credit: angela stack

Most still get approved, but even prime-risk customers are having a harder time getting auto loans approved in the current credit crisis.

That’s according to CNW Marketing Research, which said that the share of auto loan applications that got final approval dropped for all three of the main credit-risk categories — prime, near-prime, and subprime.

“Even a prime customer is having a significantly harder time getting a loan approval. And those loans that are approved have to be submitted to more financial institutions,” said CNW President Art Spinella, in a Sept. 25 note.

In 2008, about 81 percent of prime-risk loan applications eventually got approved, down from about 91 percent in the year-ago period, from Jan. 1 to Sept. 20, CNW said. Near-prime approvals fell to 77 percent, from 86 percent.

The subprime auto loan category fell the most, as might be expected, considering that the disaster in subprime mortgages helped kick off the credit crisis in the first place.

Spinella didn’t say so, but that extreme turnabout helps suggest how the finance industry got into the current mess. A year ago, more than two-thirds of the riskiest customers, paying the highest interest rates, got approved. A year later, the industry is turning down three out of four.

Source: BNET

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That said, anytime there is at least a half-point drop in interest rates, taking on a new loan or refinancing is worth considering, said Steve Higa, a Honolulu-based mortgage broker with Point Financial.

For those whose credit scores and loan-to-value ratios still allow them to obtain new mortgages or refinance under better terms, the gains can be substantial, Higa said.

Source: Honolulu Star

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September 21, 2008

Even if the bailout stabilizes the financial sector, it will probably not lead to cheaper credit, since banks and other lenders still face major hurdles ahead. Tougher terms on credit, they add, could force Americans to do something that they have avoided for much of the past decade: live within their means.

Credit has already sharply contracted because of the downfall of the mortgage market. Lenders have increased their restrictions and cut back on their extension of loans for autos, credit cards and college educations. Because of the lack of credit, consumer spending has already slowed to anemic growth rates, damaging the fragile economy.

And foreign investors, who bought up mortgage securities and other U.S. debt, could become less willing to fund U.S. borrowing.

“Consumers will actually have to pay their credit cards down each month and save money for down payments on a home,” Morici said.

Daniel Penrod, industry analyst for the California Credit Union League, said that if consumers started saving money and turned away from relying on credit to maintain their lifestyles, it would be good for the economy in the long run.

“But given the current situation, with unemployment growing and costs of goods like gasoline rising, that’s a difficult path,” he said.

Easy money

Economists trace the rapid growth of debt to the economic slowdown of 2001, when the Federal Reserve began slashing interest rates and injecting massive amounts of money to prevent the economy from going into recession after the dot-com crash.

Those rock-bottom interest rates – the lowest in 40 years – triggered massive borrowing by banks and other financial institutions, which saw an opening to make money. By borrowing money at low rates and then relending it to consumers at higher rates, they could generate huge profits.

Investors increasingly saw an opportunity to boost their returns by using borrowed money. That leverage can pay off spectacularly when an investment does well, but it can lead to disaster in a down market.

Financial sector borrowing rose at a rate of 10 percent a year from 2002 to 2007. Even after adjusting for inflation, financial sector debt is now 74 percent higher than it was in 2000 and 10 times as high as it was in 1980.

The banks used that money to extend cheap loans and credit cards to U.S. consumers. To attract customers, they stripped away the normal requirements for loans, offering easy credit terms to borrowers. Between 2002 and 2006, household debt grew at an annual rate of 11 percent, far outpacing overall economic growth. Much of that came through home equity loans.

During the height of the housing boom, home buyers used the loans to buy necessities as well as such luxuries as SUVs or flat-screen TVs. Between 2002 and 2007, homeowners took out $1.7 trillion more in home loans than they spent on their homes or home improvements.

Scott Lilly, a senior fellow at the Center for American Progress, a liberal think tank in Washington, said the cheap mortgages made up for the fact that growth in U.S. wages stalled in 2000 and has since fallen behind the inflation rate.

Lilly said that under normal circumstances, the slowdown in wage growth would have led to an economic recession. But the availability of cheap credit helped Americans afford goods and services they could not have afforded with their salaries alone.

“The prescription was easy credit – car loans, credit cards, and most importantly, mortgages,” he said.

The lenders then repackaged the loans into mortgage-backed securities that they sold on Wall Street and overseas. Financial institutions in China, Japan, Europe and the oil-rich nations of the Middle East vied to buy the loans, since they saw the United States as being a safe, predictable place to invest.

There was such demand from abroad for U.S. mortgages that lenders competed with one another to attract borrowers, offering “teaser” rates of as low as 1 percent to pull people in. They assured borrowers that by the time the rates adjusted upward, they would be able to refinance at cheap rates or resell the home for a profit.

The cheap lending drove demand for homes to record highs. In San Diego County, the median price of a home hit $517,500 at its peak in November 2005 – almost double what it had been just four years earlier.

When the interest rates began to adjust upward, however, many of those borrowers found they could not pay for their loans. And with home values falling, they couldn’t sell the homes at the price they had paid for them. Many stopped making payments, driving down the value of the mortgage-backed securities being peddled on Wall Street.

In the wake of the collapse – the bursting of one of the biggest financial bubbles in the nation’s history – dozens of mortgage firms went bankrupt or were acquired by competitors, including Countrywide Mortgage and San Diego’s Accredited Home Lenders. Wall Street firms that dealt in the securities – such as Bear Stearns, Merrill Lynch and Lehman Brothers – also nose-dived. The semi-privatized Fannie Mae and Freddie Mac mortgage agencies were seized by the federal government.

Because so many foreign investments were tied to the U.S. mortgage market, the crash resounded throughout the world. Stock markets in Tokyo, Hong Kong, London and Frankfurt swooned. Russia temporarily closed the Moscow exchange to prevent a panic.

‘Already broke’

Although the federal move has temporarily stanched the bleeding, economists are skeptical about what the government can do.

Sylvain Champonnois, a finance specialist at the University of California San Diego, compared the federal initiative to a similar move by the Japanese government in the early 1990s, which took place after Tokyo’s stock market imploded at the tail end of a real estate bubble.

“In Japan, they call the 1990s ‘the lost decade’ because of the crisis. And the level of debt in Japan remains enormous,” he said. “Hopefully, things will rebound faster here, because our government is acting faster than the Japanese did.”

Laurence Kotlikoff, an economist at Boston University, questioned the government’s ability to take on much more debt. He noted that in addition to offering a bailout of the mortgage-related assets on Wall Street, the government has also committed itself to backing money-market funds and checking accounts.

“The government is already broke,” Kotlikoff said. “The official debt level is the least of our problems. When you consider all the baby boomers that will be retiring in the next few years, requiring Medicare benefits and Social Security, we have huge fiscal problems hanging over the marketplace. This administration has been the most fiscally profligate in modern times.”

Dean Calbreath: (619) 293-1891; dean.calbreath@uniontrib.com

San Diege Union Tribune

[ed. Financial bubbles are not a new thing. I think the writer's headline that consumers' "addiction" is the root of the problem is overstated. The consumer credit economy has provided a comfortable lifestyle to more people than any economic system in history. The majority of families live well within their means and are not overextended on credit. Better to have less credit avaialble for the rest of us than panic into into a full blown socialist system.]

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Gail MarksJarvis
September 21, 200

The nation’s financial crisis seems to have eased. But that doesn’t mean consumers, investors and the economy are in the clear.

The government proved during one of the most remarkable weeks in the nation’s financial history that it would stop at nothing to prevent a meltdown.

When it appeared that “shorting stocks”—or betting they would fall—was causing financial firms to plunge to their deaths, the government changed the rules and outlawed, temporarily, what has been a lawful practice.

When it appeared that a run on the bank could destroy savers’ money in money market funds, the government stepped forward to insure the $3.4 trillion in the funds.

But cauterizing a wound in the financial system is different than healing the economy.

Despite last week’s interventions by the government, the credit crunch will continue to disrupt plans for families and businesses, threaten jobs, weigh on the economy and disappoint investors.

College students won’t be able to get private loans from banks unless they are willing to pay interest rates around 12 percent and have parents with high credit scores.

With home values down sharply, owners may have trouble obtaining home-equity loans. People interested in buying new homes will have to hunt to find a mortgage unless they have a pristine credit history and a large down payment. Consumers will have to be vigilant about paying credit card bills.

Credit is the economy’s lifeblood, enabling consumers and businesses to buy now and make payments later.

With banks injured by the collapse of housing and mortgage-related bonds, the credit system remains broken…

[ed. Following the path for how to improve your credit is getting trickier - and more necessary.]

Source Chicago Tribune

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