Credit Conditions

As Director of Community Outreach and Education for the Consumer Credit Counseling Service of the Delaware Valley, Stephanie Bittner has a ringside seat to the difficulties facing consumers. Oftentimes, it's not a pretty sight.

Take the working-class couple in their 40s who recently visited her office. The residents of Philadelphia -- whom Bittner declined to name for reasons of confidentiality -- were eager to move to a dream house in New Jersey. They hoped to finance their purchase through an adjustable-rate mortgage which they reasoned they could afford once they sold their house in Philadelphia.

The couple got their mortgage at a time when credit standards were less stringent. Consumers were able to get so-called liar loans in which they did not have to verify their income level. Since banks got burned by these types of loans, they have ratcheted up their lending standards at a time when people are increasingly falling behind in their bills. Credit-worthy clients can still get deals such as zero-percent financing, but even those consumers are facing extra scrutiny

As the real estate market soured, the house owned by Bittner's clients would not sell. They soon fell behind in both the mortgage for that home and the one for the property they hoped to acquire. When they sought credit counseling, Bittner quickly realized that the couple could not afford their dream house even if they sold their property in Philadelphia. The news came as a shock.

"The woman stormed out of my office," said Bittner, whose organization may double its client base this year. "I just have to be honest with people. I am assuming at one point or another their mortgage broker or real estate agent made them think they could do it."

Their dream house, though, was beyond their reach. "It was definitely a no-brainer," she said. "There is no way that they would have ever been approved today."

Today, given the turmoil on Wall Street caused by the liquidation of Lehman Brothers, the forced sale of Merrill Lynch & Co. and the $85 billion rescue of American International Group Inc., access to credit may get even more difficult for consumers, according to Keith Leggett, senior economist at the American Bankers Association.

"We are not in the same environment that we were in 2005 and 2006 when underwriting standards got very lax," Leggett said in an interview. "There has been a tightening of underwriting standards."

Lured by cheap interest rates, many consumers simply took on more debt than handle. Data from the American Bankers Association shows that the percentage of home equity lines of credit more than 30 days past due rose 14 basis points to 1.10 percent in the first quarter on a seasonally adjusted basis. That?s the highest recorded rate since the ABA began collecting this data in 1987. Bank card delinquencies soared by 13 basis points during that same time.

Increasing debt loads are proving to be a vexing challenge for many consumers. People have run through their savings and are now being forced to live off early withdrawals from their retirement plans, said Scott Scredon, spokesman for Consumer Credit Counseling Services of Atlanta, one of the largest debt counseling non profits in the U.S. that serves clients across the country.

"One client with a steady job and a solid credit score tried to help a relative climb out of $20,000 in debt," he said in an email. "The client called us after suffering a job loss and struggling to pay the relative's debt."

Tightening credit markets post a tough challenge to businesses that depend on consumers being able to finance their purchases such as car dealerships and furniture stores.

People are trying to push their luck. Brad Benson, who owns a Hyundai and Mitsubishi dealership, in South Brunswick, New Jersey, saw a person get rejected for credit because they had several vehicles that were repossessed. Nonetheless, he noted that qualified consumers are able to get financed though consumers who have applied for credit noticed lower credit scores.

"Our business has been very stable," said Benson, a former player with the New York Giants.

Automobile dealership customers are able to get deals such as zero-percent financing if they are credit worthy. These types of promotions were recently offered by General Motors, Ford and Hyundai on selected models. Financing deals also are available on consumer products such as laptops on flat-panel televisions.

Raymour & Flanigan, one of the largest furniture retailers in the Northeast, has not noticed any increase in customers getting rejected for credit, said Chief Financial Officer Jim Poole.

"We have strong relationships with our financial partners and a very capable in-house credit department so we can provide options for customers to work within their budgets," said Poole in a statement. "Our customers have sound credit with good repayment histories."

Consumers, though, may find it difficult to get credit in the months to come if the economy continues to deteriorate.

"In a period where the economy is showing anemic growth, banks are going to become more cautious," said the ABA's Leggett.

The couple with two mortgages they couldn't afford eventually returned to Bittner's office. The woman thanked her for being honest. They decided to stay in their home in Philadelphia where their children attend Catholic school

Another Bittner client with good credit complained bitterly about the hassles they faced getting a mortgage. The couple had an 800 FICO score and planned to put down $100,000 on a $300,000 property. "Normally, that is a mortgage company's dream client," she said. Instead, Bittner said the man felt was "being treated like a criminal" because of the excessive amounts of documentation.

2008-09-18 14:50:15