Mortgages and Car Loans Tougher ... Not Impossible

A credit tourniquet may be threatening Main Street, but so far there is enough money in the system for consumers to get mortgages or auto loans, at least those with good credit scores—but under stricter terms.

“What you have seen is that the underwriting standards have gotten tougher, that’s natural, it is just requiring people putting a little more skin in the game to get credit,” said Keith Leggett, senior economist with the American Bankers Association.

AP

“What you will find is that you may pay a little more for credit because the spreads have widened, but I think people with good credit history are not going to have a problem getting credit.”

Even in the most troubled sector of the consumer market, housing, mortgages are still available, although under stricter terms than have been seen in probably a decade.

“Credit is available, definitely, if you can verify your income—there is not more [just] stated income—and if you are willing to pay the price” of higher interest rates,” said Trudi Onus, mortgage broker at Palm Beach Financial Network in Stuart, Florida, who reports local business is up this year compared to the doldrums of last year. “Rates are anywhere between 6.25 and 7.25 [percent] depending on what your credit score is.”

That is a testament to just how well-greased the consumer credit system is.

Home equity loans, after all, have plummeted 70 percent (by volume) during the last six quarters. “That’s massive,” said Joe Belew, President of the Consumer Banking Association.

Still, he said, “there is lending going on, we haven’t shut down, it’s just it is noticeably slower...[And] it’s tight all over. It is an across the board slow-down.”

But overall, credit is still expanding. The Federal Reserve’s weekly Assets and Liabilities of Commercial Banks report shows there was an 8.15 percent increase in loans and leases from August last year.

That pace has been slowing more recently as mounting indications of a recession make  bankers more cautious, but even from June to the week ending Sept. 17, credit still expanded at an annualized rate of 7.2 percent.

Some portion of this credit growth is due to companies having to rely more on bank financing, as commercial paper markets have seized up. And there are signs firms are preemptively drawing down their lines of credit in order to maintain their own liquidity, explained Leggett

See Jim Bianco, president of Bianco Research in video at left on the consequence of a banking system that is too small given the size of the economy.

In fact, Leggett said he recently had an unsolicited 55 percent increase in his credit line.  “I just got it in the mail, they were going through their periodic review and they said ‘Hey, you are a good customer,’ " he said.

Auto Loans Tighten

But there are also clear signs of tightening credit, especially as loan delinquencies rise.

Take auto loans. Lending losses in this business line doubled in 2007 over the previous year, according to a Consumer Banking Association report.

Even though repossession rates are still relatively low—just over 2 percent—lenders have moved to stem those losses by demanding higher down payments and higher credit scores. Less applications are approved and loans have quicker repayments windows.

It will be tougher to get credit in the months ahead. So what should consumers do?

These efforts are already reflected in auto sales, which plunged 25 percent from the beginning of the year on an annualized basis—from 16.5 million to 12.8 million.

© 2008 CNBC.com