Consumers: Caught in the Credit Squeeze

With or without a bailout package, consumer credit will be tight in the short term, analysts say

A failed rescue of foundering financial institutions (, 9/29/08) could hit consumers where it hurts, making it harder for individuals to refinance mortgages and secure new-car loans, among other things.

With or without a bill, consumer credit will continue to be tight in the short term, says Keith Gumbinger, vice-president of HSH Associates, the nation's largest publisher of mortgage and consumer loan information. In the housing market, the tighter the credit—or, the higher the standards required by a bank to secure a loan—the smaller the pool of potential home buyers, and the harder it becomes for them to obtain loans. "It's not like flipping on a light switch," explains Gumbinger. "Some of these institutions have hundreds of millions of dollars in underwater assets. They're not in a big hurry to make loans."

But with no bailout bill, the volume of lending could collapse, says George Feiger, CEO of Contango Capital Advisors: "If this spiral continues, there's going to be even less lending."

Worker Paychecks Threatened

In pushing for their plan to buy up troubled mortgage assets, Treasury Secretary Henry Paulson and Federal Reserve Board Chairman Ben Bernanke were reacting as much to that tightening credit picture as they were to the threat plunging stock prices posed to large financial institutions. For weeks now, banks have been a lot less willing to loan money to one another, let alone to consumers. Since the beginning of September, the rate of interest at which banks offer to lend money to one another—known as Libor, or London interbank offered rate—has increased by more than 40%.

Gumbinger believes that, assuming a bailout bill eventually passes, it will "have the ability to help unclog the arteries of the financial system, providing more liquidity and lower cost of credit to the marketplace"—meaning banks would have more money to loan out, and they would loan it out at lower rates.

But until that happens, deteriorating conditions have the potential to threaten workers' paychecks, says John Courson, chief operating officer of the Mortgage Bankers Assn. In a statement released late Monday that urged congressional and Administration negotiators to reach a new agreement, Courson said: "The credit crunch is…preventing large (, 9/29/08) and small businesses (, 9/26/08) from being able to borrow money, money they use to operate their businesses, upgrading facilities and equipment, and hiring and paying workers."

Everyone Gets Hurt

In the Federal Reserve's most recent (July) quarterly survey of senior loan officers about bank lending practices, almost two-thirds of domestic banks reported tighter lending standards on credit-card loans over the last three months, vs. 30% in April. (For the most part, those tighter standards took the form of lower card credit limits.) Sixty-seven percent also indicated it was harder for consumers to obtain loans other than credit-card loans, vs. 45% in the previous survey.

October's survey will probably bring even more bad news. "There will be fewer institutions reporting, and you're likely to see even tighter standards," said Egan-Jones Ratings Managing Director Sean Egan.

Feiger scoffed at the notion that the credit crisis will hurt just rich Wall Street executives: "Let's suppose that all the banks in the economy went broke. Do you think that would be good for the economy?"

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