Wednesday 26 November 2008
by: Ron Lieber and Tara Siegel Bernard, The New York Times
Although new government plans will make borrowing easier for some, many Americans may be ineligible for cheaper rates. (Photo: Reuters)
If you’re buying a home, refinancing a mortgage or seeking an auto or student loan, the new government plans to make borrowing cheaper and easier sound like a gift.
One problem, however, is that whole categories of people may be ineligible. If you are refinancing, you could be out of luck if your mortgage balance is more than your house is worth. And for all kinds of new loans, lenders have raised their standards even as their customers' credit records are deteriorating because of late payments and other problems.
And then there is the fact that the government’s efforts may take a while to start working - if they do at all. Once again, the government hopes that the benefits to consumers will trickle down. It is not simply lending to them directly.
So while mortgage rates fell by at least a quarter of a percentage point on Tuesday, the day of the government announcement, and stayed there Wednesday, it could take months for the piece that affects credit card and small-business loans to kick in.
"It’s not going to be like flipping a light switch," said Joe Belew, president of the Consumer Bankers Association. "You’re not going to see an avalanche of new loans. But the system is under a lot of stress, and anything that can lubricate the markets is a good thing."
The federal government made two big moves on Tuesday. The first, already known as TALF, for Term Asset-Backed Securities Loan Facility, is a $200 billion program that will lend money to private investors who buy securities backed by student and auto loans, credit card debt and small-business loans guaranteed by the Small Business Administration.
The goal of the plan is to fix the mechanism that keeps credit flowing freely from lenders to borrowers. Lenders often package consumer loans into securities and sell them to investors. Then the lenders use the proceeds to issue more loans to consumers. But over the last two months, those investors have stopped buying.
To encourage those investors to start buying again, the Federal Reserve has agreed to lend them money at attractive interest rates to buy the securities backed by consumer debt. It is also providing an insurance policy should many of the loans underlying those securities default.
In the second part of the program, the Fed has agreed to purchase $500 billion of mortgage-backed securities guaranteed by Fannie Mae, Freddie Mac and Ginnie Mae.
"This brings a major buyer into the marketplace with very deep pockets to snap up available securities, and a sizable number of them at that," said Keith T. Gumbinger, vice president of the financial publisher HSH Associates in Pompton Plains, N.J. "With new demand for both debt- and mortgage-backed securities coming into the market, the dollar value of those investments can rise, helping to lower their yields. Mortgage rates track those yields, and decline right along with them."
Lower mortgage rates will certainly help some consumers qualify for mortgages who may not have otherwise; lower rates translate into lower payments. The move downward will also move some borrowers to try to refinance their mortgages. But that does not necessarily mean banks will be any more likely to oblige. Another complication is that the value of many homes - even those owned by people with stellar credit - have declined, making refinancing difficult.
"At the end of the day, it still comes down not to just a rate discussion, but a discussion about qualifications as well," said Cameron Findlay, chief economist at LendingTree. "There are fundamental elements of qualifications for loans that will inhibit the ability of this program to have any meaningful, significant impact."
Lower mortgage rates do little when unemployment rises and wages stagnate, he added.
To qualify for the best rates, borrowers will need to have a credit score of at least 720 and a down payment of at least 10 percent and probably closer to 20 percent. Borrowers seeking to refinance will need to have the same amounts in home equity.
Still, lower rates may lure some potential homebuyers back to the market. Some brokers have already started fielding calls. "The phones are ringing," said Joseph Taglivia, chief operating officer of Manhattan Mortgage. "There were certainly people who called to lock in a refinancing or to find out what they qualified for to purchase."
The efforts to loosen the purse strings in other areas of consumer lending may take longer, however, if they work at all. Most of the big credit card companies are parts of banks with billions on deposit. They can already use those deposits as a ready source for new credit card loans.
"Banks may want to fund fewer of these loans out of their deposits," said Odysseas Papadimitriou, who worked in the card industry at Capital One before starting Evolution Finance, parent company of Cardhub.com, a consumer card selection site. It is possible, he said, that they will simply swap one source of financing for another and not increase the total amount of loans that they are willing to make.
American Express is unique in that it does not have a big deposit-gathering apparatus. Joanna Lambert, a company spokeswoman, said that the company was still working through the details of the TALF program but would take advantage of it if it was eligible.
It is not yet clear how much the government program will help grease the wheels for small-business bank loans, but there is already a potential bright spot that business borrowers may not have considered. "Credit unions have been seeing so many opportunities in the marketplace," said Christine Barry, research director at Aite Group, a financial services research and consulting firm. About 40 percent of credit unions are either lending to small businesses now or expect to start doing so soon, she said.
With auto and student loans, there may be more reason for optimism, given that many lenders in these areas are specialists who may not have access to consumer deposits to use to finance loans. The renewed opportunity to sell more loans to investors could help those consumers.
But none of the government’s moves alters some unfortunate facts. Lenders want better credit scores from consumers in every category. At the same time, millions of people are much less creditworthy than they used to be, because of the damage they have done to their credit scores through late or missed payments.
Lenders themselves have contributed to the downturn in creditworthiness by lowering the credit limits on huge numbers of customers’ credit cards. This has the effect of raising the percentage of available credit that a consumer is using, which usually causes their credit scores to fall.
Clearly, the banks do not have the confidence in how consumers will handle credit that they might have had six months ago. It is not clear whether a new source of funds will cure this skittishness.
Nor is it certain how much untapped desire to borrow exists. The fact that consumer spending fell an entire percentage point last month, as the Commerce Department reported Wednesday, may reflect something other than a lack of capital.
"If consumers are afraid to make purchases, it doesn’t really matter how much available credit you have," said Mr. Papadimitriou of Evolution Finance.
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