America’s credit crisis continues to sour. On February 5, 2008, the stock market had its worst decline in nearly a year. Driven down by shrinkage in service industries, the S&P 500 stock market index dropped by 3.2%. Economists predict that in the next year, American banks will suffer great losses, with direct consequences to you, the customer. Be on the watch for how the nationwide credit crisis affects you and your assets.
If you are applying for a loan, educate yourself first about the stability of the bank, prior to committing yourself. In these dangerous economic times, you need to be sure your money is safe and that you are getting a competitive interest rate. Ask your bank frank questions about how they plan to survive in the long term. Also ask how they determine risk decisioning and what they use for loan origination solutions.
Educate yourself about the stock market and the current economic pickle in which America finds herself. Banks are stingier than ever about giving out loans, and it is in your best interest to know why, instead of assuming your loan request was denied because of that coffee stain on your tie.
On February 4 th the Federal Reserve published its most recent quarterly survey of bank-lending officers, proving that credit troubles are increasing. The Federal Reserve stated that many banks have tightened the belt on lenders, with harsher lending standards and higher rates on loans.
Do economists foresee that capital markets will head to sunnier times in 2008? Not so much. With the recession over our heads, the percentage of borrowers expected to default on their loans is expected to rise. Banks are largely suffering due to big bucks loans that aren’t being paid back.
Investors are feeling the pain. On January 30 th the S&P threatened to downgrade over 8,000 bonds and CDOs, because financial institution’s losses are posed to double in the next year to an immense $265 billion.
Although it is unlikely your bank will claim bankruptsy, other consequences are mounting. 70% of loan officers expect the quality of their credit card and other consumer-loan portfolios to become more troubled in the next year, according to the Federal Reserve’s survey. Wachovia, a substantial North Carolina based bank, fell to $51 million from $2.3 billion, mostly because of losses on residential property and car loans.
With the real estate market flailing, regional and local banks alike are more hesitant than ever to give out “construction loans.” If you were hoping to build your home and obtain a loan for it, be aware of rising interest loans and setbacks. Listen to what the experts are saying: At the end of January 2008, John Dugan, the Controller of Currency, stated that one-third of community banks currently have commercial-property loans that are over three times their capitol. Ouch. He also predicted an increase in bank failures and loan-loss reserves.
Financial regulators and bankers should combine forces to find a solution for these doomsday predictions. In the meantime, keep these facts in mind when you are applying for your next bank loan, and know that risk decisioning is tougher than ever.
