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In Era of Cheap Money, Consumers Are Shut Out

Nathaniel Popper and Tara Siegel Bernard|The New York Times

Michael Shreve, a 57-year-old science teacher in Marysville, Wash., has watched helplessly as mortgage rates have fallen. He said that despite his stellar credit score, no bank had been willing to let him trade in his 6.35 percent 30-year mortgage because his house was now worth less than when he bought it.

Shaun Curry | AFP | Getty Images

“At some point,” he said, interest rates are going to go up again, “and I should have been able to get those low rates. It’s not fair.”

As interest rates have been dropping to new lows seemingly by the week, American companies have been taking advantage of the cheap borrowing costs, but consumers have been largely left on the sidelines.

New data this week from the Federal Reserve shows that in the first quarter of this year, American businesses were taking on new debt at the fastest rate since the financial crisis in 2008. American households, though, were heading in the opposite direction, increasingly shedding debt.

And as in the case of Mr. Shreve, the lack of borrowing by American families was not always by choice. Another recent Fed report shows that while more consumers are interested in buying homes or refinancing existing mortgages, banks remain hesitant to extend credit to them.

Consumers are also getting squeezed on the investing front. Wary of the volatile financial markets and worried about the continued weakness in the economy, they have been putting more money into ordinary savings accounts, the new data shows. But those accounts are paying an average of 0.1 percent, according to

“There’s definitely winners and losers in this kind of extremely low interest rate environment,” said Ed Yardeni, the president of Yardeni Research. “In this case, any borrower that has access to the capital markets and doesn’t have to fill out a loan application at a bank is definitely going to have a tremendous advantage.”

Of course, the declining debt load of households is not necessarily bad. Many economists see it as a welcome shift from the borrowing binge that helped cause the financial crisis, and the Fed data shows that the lack of new debt has freed consumers up to spend more.

“What Americans have learned is that they can live with the old house,” said Allen Sinai, the chief executive of Decision Economics. “Why take on debt and obligate yourself? They are unencumbered more than ever before.”

But the new data underscores the polarizing impact of the central bank’s policy of pushing down interest rates on different segments of the American economy. While low rates are supposed to encourage Americans to take more risks, ordinary Americans have been unwilling or unable to take advantage of them.

Policy makers have worried that, until Americans do show a willingness to borrow, the housing market is unlikely to get back on a solid footing. Through last year, the rate at which Americans were shedding debt was slowing, but in the first quarter it began to speed up again, ticking up 0.4 percent, the new Fed data showed. American businesses, by contrast, increased their debt by 5.2 percent in the first quarter.

Some of the money borrowed by American corporations has trickled down to consumers through new hiring, increased stock prices and higher corporate tax payments. But the latest data indicates that businesses continue to use their borrowed money to pay back older, more expensive loans or to bolster their cashlike holdings, which rose to $1.7 trillion in the most recent quarter.

Not all types of consumer debt are in decline. As education costs rise, the amount of outstanding student loans rose in each of the first five months of the year, Equifax data analyzed by Moody’s Analytics showed. Lending to buy cars has also been heading upward, though with a distinct note of caution.

Alan Starling, who owns three car dealerships in the Orlando, Fla., area, said he had watched consumer behavior evolve over the last several years. “Cautious,” he said. “That is the word.”

Consumers coming to Mr. Starling are asking more questions about the fuel efficiency of the cars and worrying more about the monthly payments, he said.

“People are much more conscious of debt and not getting yourself overextended,” Mr. Starling said. He added that he drove a Chevy Volt and spent only about $25 a month on gas.

The biggest category of household debt by far is residential real estate, and debt in that sector has continued to drop for several reasons. Foreclosures and defaults have erased some of the obligations, and prospective home buyers are being held back, in part, by the restraint of the banks. A Fed survey of senior loan officers at American banks in April indicated that most banks had kept lending standards the same, or tightened them somewhat, even with a steady or rising demand for mortgages. About two-thirds of mortgage activity has been for refinancing existing loans, not for new mortgages, according to Guy Cecala, publisher of Inside Mortgage Finance.

“The real problem is that relatively few borrowers meet the tougher standards of today even if they could benefit from refinancing, and that is the frustration,” said Mr. Cecala.

He added that the last time there was more normal underwriting, in 2003, there was nearly $4 trillion in total mortgage originations, which includes refinancing and new purchases. Last year, with tougher underwriting and lower rates, total originations were $1.4 trillion.

In general, though, consumers’ anxiety about taking on new risks is driving many household decisions.

Joseph Butler, a retired banker in Bernice, La., said that after seeing the trouble that debt caused during the financial crisis, taking on loans or any other kind of risk seemed foolish. Mr. Butler said he was now entirely out of financial investments and kept all his money in a savings account at his local bank, earning less than 1 percent a year.

“I want to hunker down on what I’ve got,” he said.

The Fed survey suggests that even in the first quarter, when stock prices were shooting up, American households sold stocks and put money in assets like insured savings accounts and Treasury bonds. Falling interest rates mean these investments earn increasingly paltry returns, but they provide a degree of security.

“The retail customer right now is saying, ‘I just don’t want to lose any money,’ ” said Keith Leggett, the chief economist at the American Bankers Association.

One of the few financial investments that ordinary Americans have been willing to make is in corporate bonds. Data from the Investment Company Institute showed that Americans had put $136 billion into corporate bond funds in the first five months of the year. This has, of course, made borrowing even easier for American corporations.

“The big beneficiaries have been the corporations,” Mr. Yardeni said. “They have been raising money they don’t even need.”