According to the October 2009 Senior Loan Officer Opinion Survey, lending standards remain tight. The good news, according to the survey, is that tightening standards have eased somewhat from the “peaks reached late last year.”
While we know this general information comes as no big surprise, we believe it’s important to review the current lending conditions to determine if consumer and business lending is headed in the right direction.
Home equity lines of credit practically vanished beginning in 2008 when home prices plunged. Homeowners watched helplessly as access to their equity withered with every new report of falling home prices. Borrowers who sought to open home equity credit lines of credit were either denied or offered terms and rates not nearly as attractive as they were just a short while before.
It’s 2009 and home equity credit conditions continue to remain “tight as a drum,” writes E. Scott Reckard of the LA Times, despite other sectors of the housing market showcasing some initial signs of improvement. Mortgage rates are historically low, private interest is returning to the jumbo market, reports say that home prices are rising (or at least falling less fast) in some portions of the country, and the first-time homebuyer tax credit has been touted by realtors as housing’s savior. Despite the optimism, conditions are largely unchanged in the world of home equity, and homeowners shouldn’t expect that to change anytime soon.
Borrowers, you may have noticed that the lower cost of credit engineered by the Federal Reserve is not necessarily being fully passed on to variable rate borrowers — including those with Home Equity Lines of Credit (HELOC). The reason has been a fairly new phenomenon known as interest rate floors.
“Just as ceilings create a top possible rate, floors are a bottom limit on how low the interest rate can go,” said HSH Vice President Keith Gumbinger. Not all lenders have adopted floors, and they typically don’t exist in older contracts (before 2003).
As we mentioned in our previous post, the cutting of the Fed Funds rate will have little to no effect on mortgage rates. Rather, the Fed Funds rate will affect consumers with variable rate products. As Mary Pilon of the Wall Street Journal wrote, “consumers should take advantage of the rate cut to accelerate efforts to pay down debt and save:”
The Fed funds rate mainly impacts two major things for consumers: variable interest rates (like those on credit cards) and home equity lines of credit. The prime rate, which is a term usually buried in the fine print of your statements as the amount of interest you might pay, can be impacted. Basically, a big question this time around is whether consumers will take advantage of the low rate to pay off debts or not.
