Continued Bad Mortgages Resets, High Credit Card Debt and Tightened Capital Could Paralyze Economic Recovery, According to New Demos Report
Report Shows How Crisis Will Continue to Impact Small Business, Student Borrowers, Homeowners
New York — The household economy — especially small business, homeowners and student borrowers — will continue to suffer during a sever tightening of lending credit and capital, in spite of the federal rescue plan, according to a new report by the non-partisan public policy center Demos.
The New Squeeze: How a Perfect Storm of Bad Mortgages and Credit Card Debt Could Paralyze the Recovery, shows how the fallout from sub-prime speculation, resetting Adjustable Rate Mortgages (ARMs) and a severe tightening of lending credit and capital will impact the United States household economy.
For the average consumer, at the household level, the impact of the financial market meltdown is deep and could be long-lasting, says Jose Garcia, Associate Director of Policy and Research in the Economic Opportunity Program at Demos, With less capital flowing through the nations lending market, access to credit is dwindling, a condition that could ultimately prevent a vital recovery in the housing, consumer, capital investment and business sectors.
The Credit Squeeze report shows that, according to a report from the International Monetary Fund (IMF), U.S. losses from loans and securitized assets are likely to increase to about $1.4 trillion; based on that analysis, we are only half way there. In 2008, over $250 billion worth of mortgages will reset with another $700 billion dollars expected to reset by 2010 and beyond. While the recent rescue bill helped to address Wall Streets financial woes, it did not provide direct assistance to homeowners who have been foreclosed on in record numbers — one of the underlying causes of the credit crunch.
Credit has become more costly to consumers as the lending industry rethinks reckless lending practices. Nearly all consumers have been affected by the lack of liquidity of consumer lending products which many use to deal with economic difficulties.
Among the practices and trouble spots highlighted in the report:
Mortgages:
--Areas hard-hit by foreclosures may require 20 percent or 25 percent down payment, moving away from no document and no to low down payment mortgages which flooded the market prior to the meltdown, but far higher that the standard 10 percent down-payment that was commonly required before the sub-prime and APR loan boom.
--Cost of private mortgage insurance increase 50 percent from .5 percent of home price to .75 percent.
Home Equity:
--According to the Senior Loan Officer Opinion Survey, 75 percent of respondents said that they have tightened standards for approving revolving home equity lines of credit.
--Some lenders are blocking home equity loan holders from selling or refinancing their home until they have repaid part or the entirety of their loan.
Credit Cards:
--Among domestic banks, 58 percent report that they have tightened their lending standards on credit card loans in second quarter of 2008.
--Consumers are experiencing higher interest rates, lower credit limits, increased fees and penalties, and tightened restrictions on new credit applicants.
Student Loans
--Private student loan interest rates have increased by nearly a percentage point since October 2007.
--Lenders are requiring credit scores near 700, as opposed to 600, to qualify for private student loans, a change that affects more than 200,000 student borrowers.
Small Business Loans
--Nearly 75 percent of domestic banks have tightened lending standards for commercial and industrial loans.
--According to the National Small Business Association, credit card usage increased 28 percentage points from 16 percent to 44 percent in 2008, while bank loans decreased from 45 percent to 28 percent among small businesses.
The New Squeeze highlights leading economic indicators that continue to portend difficult times for American households in the form of higher unemployment, rising fuel and food prices, low savings rates and stagnant incomes.
With the lending market constricted, credit — which families have increasingly relied on to get by — may not be there to help American households from falling into financial insolvency as they struggle to survive on stagnant incomes, increasing costs of living and limited financial safety nets, says Garcia. We hope that the 111th Congress and the new administration take seriously the household impact of the financial meltdown and work vigorously to enact protections that prevent future lending abuses and ensure long-term stability in the household finance market
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