Experts Offer Tips on How to Survive the Credit Crunch
It’s the end of easy credit. And that's made things difficult both for investors and would-be homeowners.
CNBC talked to the experts on Tuesday on how best to survive the credit crunch. Here are some of their suggestions.
Mortgages More Difficult
Those looking for a mortgage are likely to face some challenges. Providers of mortgage loans are saying that conditions are changing almost daily.
“A lot of the products are disappearing overnight,” Sue Woodard, a home lending consultant with CTX Home Loans, told CNBC.
At the moment, credit is becoming both more expensive and scarcer, according to Jan Hatzius, chief economist at Goldman Sachs.
For example, Tom Kedrowski, manager of alternative lending at Lakeland Mortgage said he’s not writing many new subprime loans.
A year ago, consumers who had a credit score in the high 500’s could have gotten a mortgage without making any downpayment, Kedrowski said. Now, all consumers with weaker credit ratings must have at least 20% of the home’s value in cash, he said.
According to Kedrowski, these consumers often must have a credit score of more than 600 in order to get a loan.
Opportunity in High-Yield Bonds
One opportunity that may have opened up for investors is in the high-yield bond market. Although high-yield bond funds have seen speculator returns in recent years, many have taken a beating in recent weeks, CNBC’s Berth Coombs said. This may have created an opportunity for new investment.
Morningstar recommends investors look for bond funds that invest in the highest grade of high-yield, Coombs said.
Morningstar’s top high-yield fund picks are Pimco, T. Rowe Price, and Vanguard.
“In terms of individual bonds, Kathleen Gaffney of Loomis Sayles says follow the big guys and focus on companies that are on the fringe of investment grade,” Coombs said. This means bonds that are rated in the B to Triple-B range. “Avoid C-Level,” she said.
Some Sectors to Watch
Investors should also take note of sectors that are likely to get pinched by tighter credit. That would include banks, whose profits are likely to come under pressure.
There also are signs that the weakness in the housing sector is hurting consumer spending, according to Goldman’s Hatzius.
“If you look, for example, at the states that have seen the biggest boom-bust cycles such as Florida and California, consumer spending in those states is much weaker than in the rest of the economy,” Hatzius said. “I think that’s a pretty good indication that housing is important.”
The situation also is putting pressure on firms that are trying to finance acquisitions, according to Justin Wender, president of Castle Harlan. He expects to see a decline in new financial buyer activity in the short term. However, he expects the bulk of announced deals will be completed.
“The vast majority of the deals that have been announced were backstopped by investment banks and leveraged lending institutions,” he said. “The banks have very few ‘outs.’ Those deals will happen.”
According to Thomson Financial, no U.S. company has raised funds in the high-yield market since July 26, but there are some huge leveraged deals in the pipeline for the fall.