The credit crunch is history, the recession is officially over, and banks are sitting on something like $1.5 trillion in cash. So why is it still so hard for many people to get loans?
The Federal Reserve says most lenders have stopped raising their standards, but that's not the same as throwing wads of cash at people, economists note.
"If you're already extremely tight and you stop tightening, that's not easing," said Paul Kasriel, the chief economist for Northern Trust. Furthermore, he doesn't expect conditions to dramatically improve borrowers' prospects anytime soon. "There's no magic bullet that will change this," he says.
What's happening is continued fallout from the financial crisis and recession. Commercial real estate loans continue to go bad, and foreclosures in the residential market are far from over. As home values keep dropping, more people who could afford to pay their mortgages are choosing not to, allowing their homes to go into foreclosure. Currently, these strategic defaults are responsible for about one out of three foreclosures.
From a banker's perspective, these trends are reason enough to be cautious about lending right now.
"Some loans you thought were good on your books may not be good," Kasriel said. "If you use your capital today to make loans and you have more write-downs, you could find yourself undercapitalized."
Banks are required to keep some money in reserves against losses. Falling below these required levels could cause the banks to face regulatory scrutiny or even takeover. So lenders cling to tough standards, focusing most of their attention on low-risk lending to those with good to excellent credit scores.
Here's a look at three major areas of lending -- and how you can improve your chances in each if you need a loan.
Mortgages
A quick history lesson, for those of you who weren't paying attention: Until 2006, when home prices peaked, lenders competed fiercely for customers, and their lending standards were loosened considerably -- to the point where you could get a mortgage without proof of your income or assets. Even those with lousy credit scores could usually find someone to lend them money.
Those loose lending standards came back to bite lenders as first subprime mortgages and then mortgages in general started defaulting in huge numbers. Derivatives and other financial products created by Wall Street firms to amplify profit from these mortgages wound up multiplying the risk and nearly brought down the financial system.
Since the crisis, investors have balked at buying mortgages that don't come with government guarantees. Today, 90% of home loans have those guarantees. Fannie Mae and Freddie Mac, government-sponsored entities created to encourage mortgage lending, and the Federal Housing Administration buy loans from lenders and repackage them for sale to investors with guarantees to make them whole if borrowers default. Before the recession, about two-thirds of loans made had government guarantees attached.
The reduction in the market for mortgages made outside the government-backed system means fewer options for borrowers. The only good news, said Matt Hackett of direct lender Equity Now, is that Fannie, Freddie and the FHA are no longer constantly changing their lending standards, so borrowers are encountering fewer surprises and last-minute demands for documents than they might have a year ago.
"It's much easier to get a handle on it," Hackett said. "The guidelines don't change every week or every day."
Fannie and Freddie guidelines favor those with decent credit scores (FICOs of 680 and above), a 10% down payment and steady incomes documented by two years' worth of tax returns. Those with lower credit scores or smaller down payments often wind up directed to FHA loans, as the FHA handles nearly all lower-credit-score applications.
Advice for mortgage seekers now includes:
³Polish those credit scores. Pay down credit card debt, get collections cleared up by disputing them or paying them in return for removal and keep making payments on time to boost your scores. To see where you stand, buy your FICO scores from myFICO for $19.95 each. It's the only site that sells scores made from the same FICO formula most mortgage lenders use.
³Build up your down payment. It's possible to buy a home with as little as 3.5% down, but you'll be instantly "underwater" once you consider how much it costs to sell and move (usually 6% to 10% of a home's value). A bigger down payment can help keep you right-side up and win you a better interest rate. If you can save 20%, you can do without private mortgage insurance.
³Consider waiting. Home prices are still falling in many areas, and interest rates aren't expected to climb soon, so there may not be a huge penalty for waiting if you need time to boost your scores or your down payment, or both.
Car loans
Lacey Plache, the chief economist for Edmunds.com, sees "a definite easing" in auto lending standards over the past year, with more loans being made to people with less than perfect credit.
In the first three months of 2010, for example, 70% of car loans went to people with "superprime" credit -- FICO scores of 740 or above. During the same quarter this year, the percentage was down to 65.6%, Plache said, with lower credit ranges all seeing a slight increase.
That still means the majority of loans are going to the lowest-risk customers, a fact that helps explain why auto sales remain depressed. Other contributors include the fact that people are hanging on to their cars a year longer on average than before the recession, plus supply disruptions from the disasters in Japan.
If you're in the market for an auto loan:
³Understand your credit scores' impact. People with credit scores in the good-to-excellent range -- 720 to 850 on the FICO scale -- are landing interest rates averaging 4.37% on three-year auto loans. Those with scores in the 660 to 684 range pay more than 3 extra percentage points -- 7.74% -- for the same loan, according to myFICO, which uses Informa Research Services to poll auto lenders. That's a difference of more than $1,000 on a $20,000 loan. If your credit scores won't win you a great rate, consider delaying your auto purchase until you can boost your scores -- a strategy that also will give you time to save up a bigger down payment.
³Check with your credit union first. Before you walk onto a car lot, you should know how much car you can afford to buy and what rate you should be getting on a loan. Ignorance on either point can cost you dearly once you sit down to negotiate. A smart strategy, recommended by Edmunds.com, is to get approved for an auto loan from your local credit union (credit unions often offer their members better rates and terms than many banks). If the dealership can find you better financing, you can take it and cancel the credit union application. Otherwise, your funding is secure, and you don't risk getting a higher interest rate or worse terms than you deserve.
Credit cards
Credit card companies are brawling to attract the high-FICO-score crowd with 0% balance transfer offers and lavish new rewards programs. Less heralded is the return of some credit card issuers to the subprime market.
"Certain major card issuers have delved back into offering cards to those with fair credit, little credit history and bad credit," said Ben Woolsey, the director of marketing and consumer research for CreditCards.com.
Capital One and HSBC, big players in this market before the recession, have returned, with Capital One sending credit offers to those with recent bankruptcies and foreclosures. A number of smaller banks now offer credit cards to those with troubled or short credit histories.
The credit card reform law limited the fees issuers can charge for such cards, so many of these offers come with "shockingly high" interest rates. A First Premier Bank secured credit card with a $300 limit, for example, comes with a 49.9% interest rate if you carry a balance. An unsecured card with a $700 limit for those with fair credit has a 36% interest rate.
Woolsey credits a variety of factors for the credit card industry's new willingness to lend.
"A robust return to profitability, significant reduction in credit losses, lower unemployment, less uncertainty about the legislative climate and competitive pressures have all factored into the card industry ramping up its account acquisition activities," Woolsey said. "This has been more pronounced for the superprime and prime segments of the market, but for certain issuers with the right product set and risk tolerance, it has begun to include near prime and subprime markets as well."
Here's what you need to know if you're in the market for a credit card:
³The best offers are reserved for those with FICOs over 750. If you have excellent credit, you'll have plenty of offers to choose from. If you're still carrying a balance, you can use a low-rate balance transfer offer to pay off your debt. If you pay your balance in full, shop around to find the best card for your spending habits.
³Rebuild bad credit with a secured card. Those sky-high interest rates won't affect you if you don't carry a balance. Instead, charge 10% or less of the card's limit and pay it in full every month to slowly rebuild your scores. Make sure the card reports to all three credit bureaus.
By: Liz Weston,
www.money.msn.com
