While the Federal Reserve continues to pump money into the system at an unprecedented rate, less and less of it is finding its way to consumers and commercial borrowers. Instead, its being used to prop up speculators and financial firms.
The Federal Reserve’s Loan Officer Opinion Survey on Bank Lending Practices notes the impact the credit crunch is having on lending: After several years of lapse standards, we have now swung to the other extreme. At the same time, credit demand is dropping.
Here are the two key takeaways from the quarterly survey: First, both domestic and foreign respondents "expect their banks to tighten credit standards on all major loan categories in the second half of this year, and smaller, though substantial, net fractions of respondents expected their banks to tighten standards in the first half of 2009." Gee, that’s an awful lot of tightening.
The second issue: "Demand for loans from both businesses and households at domestic and foreign institutions reportedly weakened, on net, over the past three months."
This may be a bit of a chicken & egg problem: Which came first, the tightening of lending practices or the slowing demand? Or, is the demand destruction for credit merely an outgrowth of the global contraction? It is less than clear what came first.
Regardless, if a picture is worth a 1,000 words, consider these 4 charts, showing the % of Loan Officers tightening standards for:
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Residential Mortgages
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Commercial Real Estate Loans
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Commercial & Industrial Loans 
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Consumer Loans 
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Source:
The July 2008 Senior Loan Officer Opinion Survey on Bank Lending Practices
FRB, July 2008
http://www.federalreserve.gov/boarddocs/SnLoanSurvey/200808/
PDF: http://www.federalreserve.gov/boarddocs/SnLoanSurvey/200808/fullreport.pdf
I’m more and more worried about getting a loan for a house each day. I’m definitely a little freaked out, trying to read everything I can.
Barry,
I hear anecdotal evidence of OVER-tightening credit standards: consumers with 20% down payment, good FICO scores over 700, and documented sufficient income (i.e., good customers in pre-bubble days) can not get financing to buy a house. Can any TBP readers validate this?
If you’ve got 20% down, good credit, documented income, and a house that’s actually worth what you’re paying for it, you can get a loan. Note that I included the last bit, and you didn’t – that part matters. Also, your rate may be a bit… high (as in 8%). But hey, you want to buy a house in a falling market, knock yourself out.
DJUSRE index up strongly today, despite the news – I’m starting to short, as of today. The likelihood that it’ll retake March highs is low, but I’m ready to hang on for a few months. This won’t end well – except for the shorts.
Off Topic:
sorry but i am asking this question here due to the large number of smart people around.
Question: why do analyst keep the estimate low for some stocks? (or is it the buyers are ignoring the analyst estimates?)
i was looking at CRM, and notice that it is trading at almost 100 times earnings estimate of 2010. (200 times of 2009, which is more like 2008-09)
Adrian and John, the more difficult banks make to finance, the lower housing prices will go, and the more homes banks will take back in foreclosure.
Your next purchase should be from a bank. If you are smart, you can negotiate no downpayment and very good financing terms.
The banks are stuck with bad assets. This hurts their capital levels. It will only get worse for them, and better for buyers.
My point: don’t sweat the financing.
Hi
Long time reader and a relative noob. I know this is off topic, but we do not a discussion forum here yet! Maybe in the new website Barry?
Can anyone give me a coherent reason as to why the P/E ratios of the oil companies are so low uniformly across the board?
Adrian and John, the more difficult banks make to finance, the lower housing prices will go, and the more homes banks will take back in foreclosure.
Your next purchase should be from a bank. If you are smart, you can negotiate no downpayment and very good financing terms.
The banks are stuck with bad assets. This hurts their capital levels. It will only get worse for them, and better for buyers.
My point: don’t sweat the financing.
Posted by: Mike M | Aug 11, 2008 5:43:20 PM
past hoping that A & J catch his point, if you’re hopin’ to hear ” Sold, to you.” it’d behoove one to reflect on the rule that BR just covered: ” Know what you own.” Deed restrictions aren’t Fee Simple.
Interesting…as bank lending practices tighten (which is long overdue) and mortgage interest rates increase, these higher costs will begin to offset the benefits of declining house prices to potential buyers. Those who need, want and can afford to buy a house will realize it’s no longer paying off to wait for lower prices and the houseing market will begin to bottom.
We recently went into escrow with a conforming loan backed by two significant incomes and excellent credit. One week before the close of escrow we were informed of the additional requirement of documenting two months of banked net income.
Okay, that’s a new one on me, and we were not told up front that this would be a condition. I’m guessing that a lot of folks who would otherwise qualify for a loan end up going without.
Sure — our profit margin is enormous, but our grwoth prospects modest — then there is the risk that Oil prices fall.
What does the economy have to do with anything? Don’t you know that all that matters is that we have made 3 higher lows!
Do you know that the Russel 2k is only down 1.95% year to date as of today’s close.
Like lemmings being herded off the cliffs.
Should any of this be surprising? When you have a massive, mind-boggling credit bubble that we will be likely to survive, credit standards may just have to tighten a bit. Hey, driving around Harrison NY on Sunday, I saw tons of for sale signs and even one foreclosure. Wall street bonuses will be down $18 Billion over last year per the NYT, so this is just the start…I am rarely shocked in my daily market watching, but I just saw gold is down another $20 overnight, after closing the day down $40. That shocked even myself, who sees a deflationary depression coming. Car leases are going to be the next problem as the residual value of the cars is about half what was projected a few years ago…massive losses there.
that should say “lucky” to survive
In the matter of chicken v egg, slowing demand prevails. There is already too much of almost everything in the world.
Frank – “Interesting…as bank lending practices tighten (which is long overdue) and mortgage interest rates increase, these higher costs will begin to offset the benefits of declining house prices to potential buyers. Those who need, want and can afford to buy a house will realize it’s no longer paying off to wait for lower prices and the houseing market will begin to bottom”
Key line: … and can afford to buy a house
I’m not saying there isn’t anybody but… name one. NAME ONE!
(Hat tip Sam Kinison)
“less and less of it is finding its way to consumers and commercial borrowers. Instead, its being used to prop up speculators and financial firms.”
This is an extremely important point – it is not going toward business investment, productivity improvement or any other purpose that will expand or enhance the US economy. Instead, it is rushing into a void created by destruction of other money as debt – therefore money – is destroyed. It is replacing sunk money. Ultimately, it is utterly wasted.
This bodes poorly for not only 2008 but the forseeable future. In a FIRE economy, it takes lending for growth.
“For a finance-based economy like ours, this is troubling since it now takes $5.57 in new debt to fuel $1 worth of GDP growth.”
quoting Jeffrey Saut
Just referred to my copy of Prechter’s “Conquer The Crash” from a few years back…scary how he details what could happen…he was 5 years early, but it is happening similarly…some quotes:
“One can imagine a scenario in which the Fed, beginning soon after the onset of deflation, trades banknotes for portfolios of bad loans, replacing a sea of bad debt with an equal ocean of banknotes…the world is not so awash in money as it is awash in credit. Because the amount of credit dwarfs the amount of money, debt investors, who always have the option to sell bonds in large quantities, are in the driver’s seat with respect to interest rates, currency values and total quantity of credit, which means they, not the Fed, are now in charge of the prospects for inflation and deflation…for the Fed, the mass of credit that it has nursed into the world is like having raised King Kong from babyhood as a pet. he might behave, but only if you can figure out what he wants and keep him satisfied.”
I think we are now at the onset of deflation.
So let’s assume deflation is here/coming. Given the circumstances we now live in/under:
-Where does one put their money????????
You can look at history of the Great Depression and buy oil/US government bonds and maybe even pawn shops.
US gov bonds don’t seem like such a good buy now with the trillions of bonds floating around over seas and a country/countries could dump them and destroy the bonds real fast or following the laws of supply/demand no one might want US bonds and US gov bond value goes down and interest rates go up. No safe haven there IMHO.
So just where do you put money now……..
Oil did well during the last great depression. Pay day loan places have sprouted like weeds already in the Mid West too many all ready. Pawn shops would seem to take special knowledge. Ag is set to implode IMHO. I see no place to invest.
I’ve bought foreign bonds and stocks and commodities and done well but now the shine is coming off those investments.
For one of the few times in my life, I see no attractive/safe future investments.
Meanwhile –
http://biz.yahoo.com/ap/080812/fed_credit_crisis.html?.v=2
RE: blue bellied Yankee’s
“So let’s assume deflation is here/coming:
-Where does one put their money????????”
double ditto, underscored….
With all the collective wisdom that herein follow BR, can we hear some potential asset allocation schemes?
RE: blue bellied Yankee’s
“So let’s assume deflation is here/coming:
-Where does one put their money????????”
double ditto, underscored….
With all the collective wisdom that herein follow BR, can we hear some potential asset allocation schemes?
Banks are one of the largest small business lenders but their approach to lending varies. Commercial Banks decisions are based on your strength as a borrower (a good credit score, personal financial statements, experience and collateral) the banks goals for the period and their lending philosophy. Banks may be looking to expand their small business loan consumer base; others may focus on larger loans or a specific industry.
http://gewdir.com The Bad Credit Loans Blog