Conditions for People Financing Homes and New Cars Are the Best in Five Years
By TOM LAURICELLA WSJ
While most real estate agents are hardworking professionals, buyers and sellers may encounter some agents who see only the “me” in home. MarketWatch’s Jonathan Burton discusses. (Photo: AP)
To be sure, for some borrowers the purse strings are being loosened only a little. So while money is easier to borrow than it had been, the lending landscape is far from normal, experts say.
It’s still very difficult for borrowers with tarnished credit to borrow, and even on credit cards, where banks are more willing to lend, regulatory changes have generally lowered borrowing limits.
Even borrowers with strong credit can still expect much more scrutiny than in recent years.
‘Loosening Up Again’
In general, however, lending “is loosening up again after being extremely tight,” says Michele Raneri, vice president for analytics at Experian Information Solutions, a major consumer credit-rating company. “For years, it was really difficult to get different kinds of loans, bank cards, as well as mortgages.”
Melanie Welsh, president of Envision Mortgage, a Wilmington, N.C., mortgage broker, says she’s seeing some loosening of credit standards for mortgages, with banks willing to underwrite loans on slightly lower credit scores than a year or so ago.
“Banks are becoming more open to [borrowers] who don’t have perfect credit scores,” she says. That even includes loans for second homes, an area where it had been particular hard to get credit.
For individuals looking to borrow money, the post-financial-crisis landscape has been a study of futility. Because the crisis was born out of the collapse of a real-estate lending bubble, the ability of banks to lend took a direct hit.
Even after the worst of the financial crisis has passed, banks have found themselves in a much stricter regulatory environment as government clamped down on the lax lending practices that led to banks being saddled with billions of dollars in bad loans.
As a result of regulatory pressure, “banks had to back away from the [lower-rated but still] creditworthy customers who are exactly the people that need loans the most,” says Rick Spitler, co-chief executive officer of Novantas, a firm that provides consulting services to banks.
Because the financial crisis largely revolved around residential real estate, home lending took the biggest hit. It’s also taken the longest to thaw.
“We continue to have tight credit in the housing sector,” says Michele Girard, economist at RBS Americas.
But, she notes, there are “hints” that is changing. Better news for borrowers is evident in the credit scores of those getting loans.
In late 2011, for example, 50.1% of all mortgage loans were for borrowers categorized by Experian as “super prime,” a group that makes up 20.6% of the 220 million credit-active U.S. consumers in the firm’s database.
Meanwhile, “prime” borrowers got 32.7% of loans, and “near prime,” 14%. Those categories account for 33.9% and 13.3%, respectively, of Experian’s consumers.
But in the final quarter of 2013, “prime” borrowers accounted for 36.5% of all mortgages and “near prime,” 22%.
And importantly, there are simply more loans being granted. The volume of “near prime” loans rose 9.5% in the fourth quarter of 2013 from a year earlier. Loans to “prime” borrowers rose 7.7%. Subprime loans, meanwhile, have risen to 5.2% of mortgages from 3.9% a year earlier.
“That’s telling you that there is pent-up demand from consumers who want to borrow and they are now finding it easier to borrow,” says Experian’s Ms. Raneri.
While regulators are still keeping a tight lid on lending practices, “banks are relaxing their credit standards slowly and carefully,” says Mr. Spitler.
When it comes to interest rates, it’s a good news, bad news story. The average 30-year fixed-rate mortgage stood at 4.4% this past week, up from 3.6% a year ago, according to Freddie Mac. FMCC -8.15%
Attractive Interest Rates
“There’s a lot of focus on affordability based on where interest rates are today compared to a year ago…but if you look at it on a historical perspective, they’re still so attractive,” says Envision’s Ms. Welsh.
Banks are also granting more home-equity loans and lines of credit, in part because rebounding home values leave more homeowners with equity they can tap. There were $111 billion in new home-equity lines of credit handed out in 2013, up from $86 billion in 2012, according to Experian. In addition, the limits on these Helocs have also been rising.
In contrast to home loans, auto credit rebounded quickly from the crisis. That was due to a combination of factors, including a tendency of people to keep making car payments even when they stop paying a mortgage, as well as the fact that it’s often easier for a bank to resell a car that has been repossessed than a foreclosed house.
As a result, even those with the worst credit are finding it easier to borrow to purchase a car these days. The dollar value of subprime car loans rose by 31% in 2013.
Potential credit-card users, meanwhile, may be noticing more pitches in their mailbox. But a closer look may show that the borrowing limits are lower than they used to be.
The reason: laws passed in 2009 that rewrote the rules on credit cards. Those new rules made it much harder for issuers to raise interest rates on borrowers who don’t make timely payments.
As a result, banks are less willing to offer high credit limits to untested customers, says Novantas’s Mr. Spitler. Otherwise, he says, when it comes to willingness to lend via credit cards, “banks have gone pretty much back to normal.”