Thirteen hundred miles from Wall Street, Alex Fairchild is still waiting for a little of the U.S. government’s multitrillion-dollar bailouts and Federal Reserve largesse to trickle his way.
His above-average credit score and $20,000 down payment for a $195,000 condo overlooking Miami’s Biscayne Bay didn’t spare the software engineer from a mortgage application process that took so long a government tax credit he was counting on expired. After seven months under contract and appraisals from three underwriters, his developer went bankrupt and New York-based Vanguard Funding declined to provide a loan.
“The banks are just extra jittery,” said Fairchild, 40, who has been renting the unit and is starting the process anew. Lenders have gone from “too lax” before the credit crisis to “entirely too strict,” he said. “There are people like me that could be helping to get this inventory moved.”
The consumer loan market, particularly housing, remains a challenge for borrowers. Total U.S. consumer credit outstanding was $2.4 trillion in January, or 6.6 percent below its July 2008 level, the Fed said in a March 7 report. Total housing debt has declined by $536 billion since 2008 to $10.1 trillion, Fed data show. The median price of an existing U.S. home has dropped 13 percent since June to $158,800, bringing its decline since July 2006 to 31 percent, according to the Chicago-based National Association of Realtors. About 10.8 million homes were worth less than the debt owed on them in the third quarter, research firm CoreLogic Inc. said in a Dec. 13 report.
Junk Market Rally
By contrast, the least creditworthy corporations have been able to borrow record amounts at the cheapest rates ever. Junk-rated companies sold an unprecedented $287.6 billion in bonds in 2010 and are setting an even faster pace of issuance this year. Claire’s Stores Inc., the costume jewelry retailer that had debt that was almost 10 times its earnings last year, sold $450 million of bonds last month that Moody’s Investors Service gave its third-lowest rating.
The U.S. economy grew at a 2.8 percent annual rate in the fourth quarter, slower than previously calculated, and is forecast to expand 3.2 percent this year, according to the median estimate of 66 economists in a Bloomberg survey.
Household purchases account for about 70 percent of the U.S. economy, making the consumer the single biggest driver of any economic recovery. Those consumers “stumbled at bit” at the start of this year, Michael Feroli, chief U.S. economist at JPMorgan Chase & Co. in New York, said in a February note.
While the economy expanded and companies are beginning to spend more, the improvements haven’t driven the nation’s unemployment rate below 8.9 percent for almost two years and the Conference Board’s gauge of consumer confidence is still 37 percent below the level reached in July 2007.
This Time’s Different
“The 2007-2009 recession period looks different from previous economic cycles,” John McElravey, a bond analyst at Wells Fargo Securities LLC in Charlotte, North Carolina, said in a March 8 report. “Consumer credit outstanding contracted much more sharply than in other periods, and the return to positive growth rates has been relatively slow.”
The biggest strain is still being felt by Americans looking to purchase homes. The market where banks once pooled non-government-backed mortgage loans into bonds and sold them to investors is virtually shuttered, with only two such deals in the past two years, according to data compiled by Bloomberg.
Banks, faced with demands to repurchase faulty loans that JPMorgan analysts estimate may cost lenders as much as $90 billion, have raised lending standards to avoid repeating mistakes made during the housing bubble that popped in 2006.
Mortgage underwriters “have no latitude for common sense,” said Angelo Cusinato, president of Resource Plus Mortgage Corp., a home-loan broker in Inverness, Illinois. “They are underwriting as if their concern isn’t as much for the risk that the loan will go bad as the risk that they will have to buy back the loan because of some technicality in the paperwork. It continues to be very difficult, even for the homeowner that is absolutely solid gold.”
That’s not to say consumer access to credit hasn’t improved. It now costs Americans with the best credit scores 0.59 percentage point more to buy a home with a so-called jumbo mortgage than the rate they would pay for a smaller loan the government would guarantee. That spread was 1.84 percentage points in January 2009, according to Bankrate.com data, indicating lenders are becoming more comfortable with making mortgages and holding them on their books.
During the seven years before the credit crisis, jumbo loans were made for an average of 0.27 percentage point more than the rate available for conventional mortgages.
Auto, Card Lending
The average rate on a five-year auto loan, which soared in 2009 to 4.9 percentage points above what banks paid on certificates of deposit, has shrunk to 2.95 percentage points, though it’s still 0.7 percentage point more than the average from August 2000 through the start of the credit crisis seven years later.
Credit-card rates jumped in 2009 before the implementation of federal laws limiting rate increases and banning practices such as “universal default,” or raising rates based on a missed payment with another lender. The average variable-rate credit card has jumped to 13.7 percent from as low as 10.7 percent in March 2009, Bankrate.com data show.
The amount of revolving debt outstanding, which includes credit cards, fell to $795.5 billion in January from $973.6 billion in August 2008. That’s the lowest since 2004, Fed data show.
While lending standards have been easing, Fed data show banks have been more reluctant to loosen requirements for consumers and small businesses that don’t have access to bond markets and often pledge real estate as collateral for loans.
Bernanke: It’s Tight
“Currently the terms are pretty tight,” Fed Chairman Ben S. Bernanke told the Senate Committee on Banking, Housing and Urban Affairs on March 1. “That is a problem for the housing market,” he said, responding to a question from Senator Kay Hagan, a North Carolina Democrat who said she was concerned that qualified mortgage borrowers are being denied an opportunity to take advantage of low rates.
“I expect some modest improvement, but probably not anything dramatic in the near term,” Bernanke said.
Banks relaxing loan criteria to large corporations outnumbered those tightening by 10.5 percentage points in the Fed’s two most recent quarterly surveys of senior loan officers. That’s the highest rate since 2006.
Corporate Credit Spigot
For prime residential mortgages, a net 1.9 percent were still tightening. For consumer loans other than credit cards, the measure was 3.7 percentage points in the most recent survey and 5.5 in the previous one.
For small businesses, loan officers easing outnumbered those tightening by 1.9 percentage points after 7.1 points in the previous period. The banks were still toughening their criteria for small businesses and consumers through the first quarter of 2010, while they had already started loosening for corporations, the Fed survey data show.
The opening of the credit spigot to large companies has been most evident in the bond markets. The Fed’s near-zero interest rates and its $2 trillion of bond purchases since January 2009 prompted investors last year to pump a record $372.5 billion of cash into funds that buy debt, according to fund-flow tracker EPFR Global.
Yields on speculative-grade debt, rated below Baa3 by Moody’s and lower than BBB- by Standard & Poor’s, declined to as low as 7.29 percent in February, the lowest since at least 1996, according to the Bank of America Merrill Lynch U.S. High Yield Master II Index. The average, which has since risen to 7.4 percent and is 4.85 percentage points above Treasuries, is below the average of 5.5 percentage points in the seven years before credit markets seized up in 2007.
Claire’s Stores, the Pembroke Pines, Florida-based retailer of costume jewelry for teens that last year had debt 9.6 times its earnings before interest, taxes, depreciation and amortization costs, refinanced some of the debt by selling $450 million of senior secured bonds that pay a yield of 8.875 percent.
Moody’s, which rated the bonds Caa3, said that unless the company’s earnings “significantly improve,” it may have difficulty refinancing the remaining $1.2 billion of a term loan that matures in May 2014.
Investors have been drawn to corporate debt because, unlike consumers, company Treasurers have been sitting on record amounts of cash and earnings are growing, helping defaults to plunge from the highs reached during the recession.
Default Rate Falls
The default rate among U.S. speculative-grade companies has dropped to 2.8 percent through February from 12.8 percent a year earlier, according to Moody’s. The ratings firm is projecting the rate will continue dropping through the next year, to 1.7 percent in February 2012.
“Corporate America has been stockpiling a lot of cash,” said Greg McBride, a senior financial analyst at North Palm Beach, Florida-based Bankrate.com. “From the standpoint of access to credit markets, they look like a pretty good risk.”
At the same time, a greater proportion of homeowners are falling behind on their monthly payments than had been seen in three decades of record keeping by the Washington-based Mortgage Bankers’ Association before the recession.
“A major stumbling block for restoring credit to small businesses and consumers is lingering problems with residential real estate,” said John Lonski, chief economist at Moody’s Capital Markets Group in New York. “Though we see some signs of stabilization in housing, many are concerned that there could be another 5 percent to 10 percent drop in home prices, which would add to the number of home mortgages underwater.”
Home Loan Rejected
In Miami, where Fairchild wants to buy, home prices have plunged 49 percent since the peak of the housing bubble in 2006, according to S&P/Case-Shiller index data.
Fairchild failed to get a loan from Bank of America Corp. for the condo he wanted to buy after the Charlotte, North Carolina-based bank’s appraiser said the apartment was worth $130,000, 33 percent less than the agreed upon price. When Vanguard’s appraisal came in at about $180,000, Fairchild said, he offered to pay a so-called buyers premium of $20,000, partially offset by a tax credit for first-time home buyers that expired last year.
Vanguard rejected the loan, he said, even after he offered to increase the down payment. Telephone calls to Vanguard offices in Garden City, New York, weren’t returned.
Mortgage brokers say the depressed housing market is struggling on concerns by banks that they would be stuck buying back loans that investors say were misrepresented to them. Bond insurers alone have brought at least a dozen claims against banks including Bank of America and Credit Suisse AG seeking to compel them to repurchases loans they said they were fraudulently induced to guarantee.
“They just want blood,” said Grant Stern, owner of Morningside Mortgage Corp. in Bay Harbor Islands, Florida, who worked on trying to get Fairchild the loan he sought in Miami. “They’re so afraid of a repurchase that they’re papering the files with everything they can get.”
Jeffrey Mezger, chief executive officer of homebuilder KB Home, recalls a buyer in southern California in November whose mortgage was held up by a lender because he couldn’t produce the sixth page of a bank statement that was left intentionally blank.
“They said, ‘Well, if you can’t give me page six, I can’t approve your loan,” Mezger recalled during a Feb. 16 interview at Bloomberg’s headquarters in New York. “That’s the kind of stuff that was going on. You’re beating up a guy putting 30 percent down because you don’t have the page left intentionally blank.”