The Death of Credit

What the banks giveth, they clearly taketh away. 

Home mortgages? Nearly impossible to get one.  Car loans or leases?  Very, very difficult.  Credit cards? Yes, but at very high interest rates and miscellaneous charges with lower credit limits and higher minimum payments.

Business credit has all but dried up.  The possibility of financing a business by using home equity loans is non-existent.  Vendors and suppliers are stretched to the limit because they can not get operating capital to keep their inventories flowing – and most of their customers are running late on payments for the same reason.

The memory of the rush to pass the Hank Paulson’s and the Bush Administration’s emergency plan to bail out the banks is still fresh. We were told that the $700 Billion to $1.3 Trillion of our federal tax dollars had to be invested in the Wall Street banking cartel for two reasons:

1. Keep the banks open and operating until a solution for the sub-prime meltdown could be finally worked out, and
2. Expand available credit to consumers and businesses to keep the economy stable and expanding.

In spite of the passage of the bailout bill, the U.S. economy has continued on a steady free-fall, dropping to a level not seen for over ten years. The Federal Reserve stepped in and lowered the rate at which banks can borrow money to almost nothing and yet accessible credit has almost completely disappeared. So just exactly what has happened to the money that was released to the banks?

It is clear that the banks did accept the money they have received so far from Congress and the Federal Reserve to keep their doors open and to buy other smaller banks.  But for some mysterious reason in spite of this inflow of billions of taxpayer dollars, they have frustrated any attempts to get the economy back on track by closing off some credit resources and severely restricting all other loan products to the point that the average middle-class worker or homeowner has no place to turn for personal credit requirements.

Last spring (2008) JustOneOpinion.com reported that Citibank and several other major lending banks had simply slashed or closed existing home equity credit lines – in most cases without any prior warning to their clients.  Within just a few weeks, almost all sources of home equity lines of credit had completely dried up.

In a few cases, banks actually lowered their credit lines on home equity and credit cards to less than what their customers actually owed.  This had three immediate negative effects on their bank customers:

1. Borrowers were now subject to very high “over-limit fees” because their current balances were higher than their available credit lines.
2. Borrowers saw their credit scores take two immediate hits because they now had accounts that were over limit and they now also had well over 90% usage of existing credit lines. 
3. After one month, many banks would raise the interest rate to as high as 35% because their own customers, through no fault of their own, were now not only over limit but might also be unable to make the required minimum payment that included not only current interest but also the over-limit principle amount.

The damage does not stop there.  If other credit card companies see that a borrower’s credit score has gone down and/or is over-limit with another bank, they will often punish the same customer by immediately raising the interest rate and lowering the credit line on their cards as well.

In testimony before Congress, one of the heads of the Big Three auto companies remarked that sales were down by 40% and were continuing to drop.  When asked why, he testified that it was because buyers could not get car loans or leasing.  One of the Senators remarked that Congress had just approved billions of dollars to bail out the banks so that credit would be available.  He asked, “What are they doing with the taxpayers’ money?  Just sitting on it?”

Housing will continue to be depressed for months until the banks and mortgage lenders find a way to start making loans.  An acquaintance of the Editor who is in the mortgage banking business as a loan originator commented that “even if you have a job, have the downpayment, and have good credit – many bank underwriters will find a way to deny you a mortgage not only for a purchase but also for any type of refinance.” 

The bottom line is that banks are not in the mood to make loans of any kind to almost any borrower.  The net effect is that the economy will continue to fall until something makes them change their minds. 

The big questions are: “Who is benefitting from this situation?  If you follow the bailout money, where is it going?”

It is a shameful fact to admit that the major Wall Street banks actually own this country and every middle-class homeowner and small business “lock, stock and barrel.”

Actually, the probability is very strong that our situation is even worse than has just been described…