Monday, October 13, 2008

Is The Era of Easy Credit Over For The Long Haul?

Associated Press is out with a thoughtful analysis on whether this is the end of easy credit (I think it is). The appetite for credit will be dampened not only because banks will be tightening the screws but because consumers will begin to clamor for less credit as well, says AP.

Has a new day dawned? Will consumers really start living within their means? Is a seachange afoot? The story does a good job of covering those questions.

From the story: Is The Era of Easy Credit Over For The Long Haul? (link here)

"I think we're undergoing a fundamental shift from living on borrowed money to one where living within your means, saving and investing for the future, comes back into vogue," said Greg McBride, senior analyst at "This entire credit crunch is a wakeup call to anybody who was attempting to borrow their way to prosperity."

And this quote, which suggests that consumers could temper their own enthusiasm for credit:

The new era of tighter credit will largely be a mandate, as consumers are forced to adjust to tougher rules and tighter limits. But consumers have also begun showing signs of a change in mind-set, putting off purchases, buying less expensive substitutes, going out to eat less, and rethinking their propensity to do so on credit.

For now, I believe that consumers are changing their habits. Whether that change is permanent remains to be seen.

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Far Left Texas said...

Is the era of "Easy Credit" over, or is the era of "Stupid Lending" over?

Adrian Clark couldn't buy a new car with zero down, he needed to come up with $1,000. Steamfitters have a median income of $20 per hour - the down payment needed was just over a week's worth of Adrian's salary.

Don't forget, supply and demand will come into play. If not enough people apply for credit, it will become cheaper and easier to get for those who are qualified.

The days of getting a car for zero down and a 650 FICO might be gone, but people with a 750 FICO and 10% down will have no problems whatsoever - if your income will support your payment.

When they define "easy credit" as "Hey, since you are breathing, we will finance this car/house/stereo/boat for you" then yes, the days of easy credit are over.

If we define "Easy Credit" as "Your credit score is good and you have the means to repay", then I think credit will remain available and easy. said...

FLT, nice post. Your comment simply reinforces my other story that talks about working that FICO score. People with good credit will be in the best position to get credit in the future.

The days of easy credit -- with weak FICO scores -- is probably behind us.

Anonymous said...

I think living beyond your means is part of the "American Dream" and it's here to stay. Socially we've created an environment where your asset speaks for you and not your mind. What car you own, how big of a house you live in and what cool toys and gadgets you have dictate your social statues. And this is most apparent in one of the biggest and most successful economies of history, America.

So will people just become humble and down to earth just because of a drop in the dow? or because their 401k is down 50%? Will we live in utopia and create an all equal, loving, and most importantly giving society? haha. Not when we live in a world that says "what's mine is mine, what's yours is mine"

It's a tough time, but it will be all rosy and peachy in a New York minute. We'll be back to our roots living laveshly, to impress and be excepted by others, in no time.

That reminds me, time to hit that luv button, I need more $$$$. said...

Anon, haha. Great post. Got me chuckling here.

I can only speak for myself. My days of accumulating a lot of debt are behind me. That ended about three years ago for me. Best decision I ever made. I don't have a lot of new toys, but life is good.

Thanks for the post.

Now go hit that love button!

Anonymous said...

A minor tweak to Anon's (above) comment:

"What car you own..."

Should be "What car you drive..." Since the bank owns your car. Heck lots of the high end bimmers and stuff are just leased. You flush your money down the toilet to the carlord (landlord?).

Another dazzling post CM. said...

Anon, sometimes it does make sense to lease. Not always, mind you. But sometimes.

For example, in 2006, the market was getting ready to tank. BMW, in fact, had fairly high residuals on BMWs at that time (that's how they were enticing so many people to lease). BMW also had decent money factors on some of their models. It made leasing a no brainer. The amount that had to be financed (through the lease) was not large. Thus, if you thought the market was going to get hammered, you could shift a lot of the risk to the car seller (like BMW, which had priced its residuals too high).

But now that the economy is in the toilet, and car sellers (like BMW) are offering 0.9% financing deals, it makes sense to own. There are too many incentives to not own. Plus, the residuals on a lease are too low now. If I was in the market for a new BMW right now, I would be a buyer instead of a lessee here.

The Lion said...

Consumers changing their ways for good? Nah. Just for now. We might think we are permanently changed, but as all things do, that will change.

However, I do hope the era of stupid lending is over. Lenders should be looking at more than a FICO score when they lend. You can have an extremely high score with no income to repay a debt, folks. Not a good candidate for a loan, regardless of what the score is.

I predict the credit market will ease and those who have respectable scores (not as high as required now but not as low as was allowed before) and enough VERIFIABLE income to justify the loan amounts or credit limits will be approved. I also think, as unpopular as it is, that prior to any limit increase, income should be considered. If you make only $30,000 a year - should you really have over $500,000 in available credit?

And yes, I understand credit does not equal debt. But it equals the opportunity for debt. And sometimes, desperate times call for using that opportunity to your own demise. Keep limits in step with income is all I am saying! said...

Good thinking, Lion. Just as consumers will likely never change their ways for good, I don't think lenders will either.

Lenders, for a time, may do more traditional underwriting, but eventually they will get back to what they've always done.

As for your last comment about CLIs, I will have to think about that one for a bit. Actually, I don't know many people with $30K in income and half million in credit. I can't think of a single person. I know you were just throwing that number out there, though. I'm thinking that $50,000 in income and $500K in credit is still high.

The Lion said...

Exactly, CM. I don't pretend to know what the right income-available credit ratio is, but there has to be a standard.

And I don't know anyone with a $30,000 income with that much credit either (unless they lied through their teeth on the which case some research on the lender's part would be handy).

And you are right, lenders wont change and neither will consumers, in the long run, unless forced to.

Sean said...

Anon@October 13, 2008 11:34:00AM:
Your perception of the "American Dream" is NOT applicable to all social circles. I've noticed that most "old money" types are not impressed by excessive public displays of wealth. If anything, it's considered distasteful in some of the upper levels of society.

Thinking about the many former CEOs I've met over the years, the majority of them have cars that are at least 3-5 years old, don't dress to the hilt, etc. Some of them do have nice houses/condos, art collections and even some fine automobiles, but they've bought them for themselves and not to impress others. They tend to keep all of this quite private 'though. If anything, this group of people tends to live well below their means.

The only conspicuous displays of wealth I see are usually by those who do not have money. Don't believe me? Head over to the not-so-great part of town. Chances are you'll see people living in substandard housing, but they've got all the latest toys (cell phones, ipods, video games), jewelry, and of course, cars.

Head up a couple of notches up the food chain to the up-and-coming areas with acres of new housing and you'll see similar things happening. The housing's better, but they're up to their eyeballs in debt. Yet, they have a 1-2 year old cars, new houses, and of course all of the toys, and barely any cash assets.

At a recent dinner, I was discussing the current financial climate with a Wall St. investment banker. She agreed that the current "crisis" was caused by people playing loose with the purse strings. Quite simply, loans (and credit lines) were being made to people who never should have ever received them, nor would they ever have received them in the past. She also is of the belief that this "crisis" isn't as bad as the market is reacting to it, but then again, there's a lot of inexperienced traders in the markets now compared to decades past.

We also got into an interesting definition of "afford." She defines "affording" something as knowing you're able to pay for something, in cash immediately...but choose not to. Indeed, I find this way of thinking and living quite liberating. said...

Sean, my favorite part of your post came at the very end. I love the definition of afford.


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