The Great Consumer Credit Squeeze

Banks are busy putting the screws to the middle class once again, this time in the form of reduced credit. The Wall Street Journal reports Residential Loans, refinance of mortgages and home equity loans are being subject to absurd credit requirements.

Are the banks going to investigate if you chewed gum and if so, deny you a loan for it next?

Recently, Mr. Berg arranged a refinancing for a borrower with a very high credit score and lots of home equity and debt payments totaling just 19% of pretax income. But Mr. Berg said the lender was worried about a credit report showing a $14 missed payment to a credit-card company in 2001. The lender insisted on proof the money had been paid, which Mr. Berg said was impossible to get.

"Who cares?" he said. "It's nine years ago, and it's $14." He appeased the lender by having the borrower write a $14 check, though no one knew where to send it.

Pete Ogilvie, a mortgage broker in Santa Cruz, Calif., hasn't found a bank that will refinance a $250,000 loan on a $1 million property for a borrower with more than $200,000 a year in income and a high credit score. Banks balked because the borrower, a technology executive, was out of work for nearly a year starting in 2008.

Wells Fargo now ends free checking to collect yet another fee on our meager earnings. Previously we noted Wells Fargo is moving into payday loans.

From last Thursday's Federal Reserve consumer credit report for May 2010:

Consumer credit decreased at an annual rate of 4.5% in May 2010. Revolving credit decreased at an annual rate of 10.5%, and nonrevolving credit decreased at an annual rate of 1.5%.

Below is total consumer credit for a decade. Realize non-institutional civilian population (the group most likely to obtain credit), during the decade has increased 11%, from 212.5 million to 237.7 million. While credit card late payments fell, to 3.9%, this metric fails to take into account the never ending declining consumer credit even available to be late on.



Below is the St. Louis Fed graph for total revolving credit for the past 5 years.



And non-revolving credit:



From April 2010 data, below is a graph on lenders tightening credit standards on consumer loans. Notice the uptick in April 2010.



Meanwhile Arizona takes a bold step and makes loan shark rates illegal. As a result payday lenders are fleeing Arizona.

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Another take on this

This article puts the consumer credit numbers into perspective.

The Wall Street Journal is one that looked at the Fed report in a different light. The real reason for the decline, the WSJ says, is that the “$19.5 billion in debt reduced in the first three months of the year, $18.7 billion of that – almost 96 percent – was actually written off by these credit card companies as being irretrievable.”
Essentially, the latest reports from credit card companies like JP Morgan Chase, Bank of America, Citigroup, Discover and American Express only cover a portion of the public – those who are still part of the credit system and have access to credit.
CreditLoan’s blog also says that because of unemployment, layoffs, pay cuts, many Americans have filed for bankruptcy, foreclosure, debt settlement, etc. These events have severely affected their credit scores as well as their access to credit. Simply put, many people do not have access to any line of credit anymore. “This fact again indicates that current reports on credit trends are inaccurate snapshots of the economy as a whole,” CreditLoan adds.

We have entered the post-credit world.

credit scores, tis true, they are falling

If you got no income, you cannot borrow. HuffPo (why is it when you go to the corporate website these so called press releases that have damning information are never posted and how do we get better access to them?) has an article showing the drop in credit scores:

Figures provided by FICO Inc. show that 25.5 percent of consumers – nearly 43.4 million people – now have a credit score of 599 or below, marking them as poor risks for lenders. It's unlikely they will be able to get credit cards, auto loans or mortgages under the tighter lending standards banks now use.

Because consumers relied so heavily on debt to fuel their spending in recent years, their restricted access to credit is one reason for the slow economic recovery.

"I don't get paid for loan applications, I get paid for closings," said Ritch Workman, a Melbourne, Fla., mortgage broker. "I have plenty of business, but I'm struggling to stay open."

FICO's latest analysis is based on consumer credit reports as of April. Its findings represent an increase of about 2.4 million people in the lowest credit score categories in the past two years. Before the Great Recession, scores on FICO's 300-to-850 scale weren't as volatile, said Andrew Jennings, chief research officer for FICO in Minneapolis. Historically, just 15 percent of the 170 million consumers with active credit accounts, or 25.5 million people, fell below 599, according to data posted on

But, on the other hand, there are plenty of reports of people who perfectly solid income streams getting denied credit over absurdities.

I'd like to see the percentage of denials when people are trying to refinance debt, mortgages to reduce their debt. I'll bet dollars to donuts that's where the credit crunch is, but I don't have the stats vs. percentage of people who are so broke, there is no way they can pay back their debt.