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The myth of the credit crunch and the truth of the bailout
TokyoRaver
Registered User regular
Registered User regular
OK, so you're thinking "What the fuck TokyoRaver, you work in the financial sector, why are you calling the credit crunch a myth?"
Well, that's exactly why: I work in the financial sector. Maybe I shouldn't air a couple dirty little secrets there are, but fuck it, here I go:
You can still get consumer credit.
But this isn't what you've heard! You've heard the banks are too scared to lend! Nah, bullshit. Here's the drill:
We're lending at traditional credit standards. We're looking at loans and approving them when they have debt-to-income ratios of 45% or below (as in, if you are spending less than 45% of your gross monthly income on your obligations, we are giving you money.)
It used to be, in the bad old days, that banks wouldn't lend you money if your DTI was over 35%. If anything, we should be lucky to have 45%! (raps cane on table)
No, seriously.
Hell, on some products (conforming loans, loans under 417,000, which makes up a majority of the market) we can even get loans with good compensating factors approved with up to a 60% DTI. Keep in mind this is GROSS monthly income, pre-tax.
Credit? Got above a 580 FICO score? Oh, good. I can give you up to $729,750 as long as your debt to income is below 45%.
(realistically, if you have below that score, you shouldn't be able to borrow money.)
Oh, and did I mention that interest rates are hovering near historical lows? 6%! That's affordable for a mortgage!
So where's the big problem?
OK, this is what I think.
I think that these traditional credit limitations limit the market. I think that banks and consumers alike are ready for a return to loose lending standards, that they've become accustomed to them. Apparently it's too much to ask that we lend within reasonable affordability guidelines, we need to loosen those further. Have things overtightened? Yes, in some ways; I think that the adjustments for credit scores that remain over 700 are a bit much. I think that a reasonable floor for credit adjusters (points that you pay as a penalty for having less than perfect credit) is 680. I think we need some sort of stated income program for self-employed borrowers ONLY, as there is a huge segment of the population of potential homebuyers who are legitimately qualified to buy homes, with strong asset and credit health, who are ineligible to purchase a property because nearly all their income is legally written off on their tax returns, leaving people with 200K a year income with 40K on the books. I think banks should have the ability to use discretion in those cases.
Otherwise, as someone whose income entirely depends on these credit standards, I'm pretty much good, thanks.
So it's a little perplexing to me to hear people talk about the entire freezeup of the credit market, how banks are unwilling to lend. Banks seem to be in the situation where they only lend money where it makes sense, which to me is a reasonable expectation. I think a lot of people want to return to the bad old days of credit available to warm bodies (income optional) and then we're simply setting ourselves up for this shit to happen again.
You'll have to forgive me for not elaborating on the other sectors of the market; I know a bit about them but not the details; my understanding is that it's much the same. I'd say that for student and business loans, we definitely need to look at the need, and perhaps there should be a federal insurance program so banks are able to lend to riskier borrowers without taking on significant liability.
Now, part II of my post.
What, exactly, are we trying to protect here?
I've been thinking a lot about this. A lot. And I'm convinced that we're trying to protect, at least in the mortgage industry, the extrinsic (market) value of homes. I'm not sure how I feel about that.
It seems to me that the whole reason that we need such high debt to income ratios to qualify people for loans is because property values have far and away become disassociated with their intrinsic values. I'd say that that's ok, to an extent, but that ultimately the market should not be obligated to support rising values that limit affordability. In fact, the loan market should probably be static; if properties in an area become unaffordable to a majority of the population, well, that's too damn bad. Banks shouldn't loosen their lending standards so everyone can afford a home in the Hamptons or on Central Park West. You have to have the income to support it, bottom line.
But everyone seems to want to protect unrealistic values, perhaps because there are so many homeowners in the country. I don't favor bailing out individuals or the banks beyond the point necessary to allow lending at sensible standards to continue.
So I think maybe we should wait to see this legendary credit freeze occur before bailing out anything; maybe it doesn't make sense. I don't support allowing the same thing to happen again, even though my income would directly benefit from that.
It does seem to me that greed and the unwillingness to let the white middle class of this country take a hit is what's behind this. I think a major regulatory overhaul that may restructure how banks operate may be in order.
Well, that's exactly why: I work in the financial sector. Maybe I shouldn't air a couple dirty little secrets there are, but fuck it, here I go:
You can still get consumer credit.
But this isn't what you've heard! You've heard the banks are too scared to lend! Nah, bullshit. Here's the drill:
We're lending at traditional credit standards. We're looking at loans and approving them when they have debt-to-income ratios of 45% or below (as in, if you are spending less than 45% of your gross monthly income on your obligations, we are giving you money.)
It used to be, in the bad old days, that banks wouldn't lend you money if your DTI was over 35%. If anything, we should be lucky to have 45%! (raps cane on table)
No, seriously.
Hell, on some products (conforming loans, loans under 417,000, which makes up a majority of the market) we can even get loans with good compensating factors approved with up to a 60% DTI. Keep in mind this is GROSS monthly income, pre-tax.
Credit? Got above a 580 FICO score? Oh, good. I can give you up to $729,750 as long as your debt to income is below 45%.
(realistically, if you have below that score, you shouldn't be able to borrow money.)
Oh, and did I mention that interest rates are hovering near historical lows? 6%! That's affordable for a mortgage!
So where's the big problem?
OK, this is what I think.
I think that these traditional credit limitations limit the market. I think that banks and consumers alike are ready for a return to loose lending standards, that they've become accustomed to them. Apparently it's too much to ask that we lend within reasonable affordability guidelines, we need to loosen those further. Have things overtightened? Yes, in some ways; I think that the adjustments for credit scores that remain over 700 are a bit much. I think that a reasonable floor for credit adjusters (points that you pay as a penalty for having less than perfect credit) is 680. I think we need some sort of stated income program for self-employed borrowers ONLY, as there is a huge segment of the population of potential homebuyers who are legitimately qualified to buy homes, with strong asset and credit health, who are ineligible to purchase a property because nearly all their income is legally written off on their tax returns, leaving people with 200K a year income with 40K on the books. I think banks should have the ability to use discretion in those cases.
Otherwise, as someone whose income entirely depends on these credit standards, I'm pretty much good, thanks.
So it's a little perplexing to me to hear people talk about the entire freezeup of the credit market, how banks are unwilling to lend. Banks seem to be in the situation where they only lend money where it makes sense, which to me is a reasonable expectation. I think a lot of people want to return to the bad old days of credit available to warm bodies (income optional) and then we're simply setting ourselves up for this shit to happen again.
You'll have to forgive me for not elaborating on the other sectors of the market; I know a bit about them but not the details; my understanding is that it's much the same. I'd say that for student and business loans, we definitely need to look at the need, and perhaps there should be a federal insurance program so banks are able to lend to riskier borrowers without taking on significant liability.
Now, part II of my post.
What, exactly, are we trying to protect here?
I've been thinking a lot about this. A lot. And I'm convinced that we're trying to protect, at least in the mortgage industry, the extrinsic (market) value of homes. I'm not sure how I feel about that.
It seems to me that the whole reason that we need such high debt to income ratios to qualify people for loans is because property values have far and away become disassociated with their intrinsic values. I'd say that that's ok, to an extent, but that ultimately the market should not be obligated to support rising values that limit affordability. In fact, the loan market should probably be static; if properties in an area become unaffordable to a majority of the population, well, that's too damn bad. Banks shouldn't loosen their lending standards so everyone can afford a home in the Hamptons or on Central Park West. You have to have the income to support it, bottom line.
But everyone seems to want to protect unrealistic values, perhaps because there are so many homeowners in the country. I don't favor bailing out individuals or the banks beyond the point necessary to allow lending at sensible standards to continue.
So I think maybe we should wait to see this legendary credit freeze occur before bailing out anything; maybe it doesn't make sense. I don't support allowing the same thing to happen again, even though my income would directly benefit from that.
It does seem to me that greed and the unwillingness to let the white middle class of this country take a hit is what's behind this. I think a major regulatory overhaul that may restructure how banks operate may be in order.
TokyoRaver on
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Because looking at the latest data, with 30 day commercial paper at a 400 basis point spread and the TED spread at 360 basis points, you're seeing the start of a major credit contraction.
It's not going to happen overnight, but companies are going to start getting less money for short term loans, if any. Those companies are going to be buying less materials from their suppliers. The suppliers are going to need less people and so on and so on.
A lot of companies do not operate on a pure cash basis or have enough money in the bank to cover their next 6 months of expenses but operate off of the float between their liabilities and expected income to get credit from the banks. And if the banks aren't willing to lend them money or want extremely high yields on those short term loans? The companies are going to start cutting their operating costs.