Over the last couple years, many consumers were burned badly by the state of the economy and the failing of many of the banks people have relied upon for generations.
At the beginning of 2007, the United States had five investment banks, through which a lot of investment transactions occurred. By the end of 2008, there were zero investment banks in the United States. The investment banks that did not fail outright, changed their charters to commercial banks, thereby eliminating all investment banks in the U.S. by the end of 2008.
Where people got hurt the worst in the recent economic meltdown was when banks stopped loaning money to consumers and businesses.
Banker fears turned our economy on its ear, erasing positive growth and replacing it with recession.
Bankers started to question the viability of their competitors and stopped loaning money to their competitors. Suddenly, when major banking institutions were no longer able to get money to loan to their own clients, banks began to turn off the business credit and consumer credit tap.
We knew the gig was up when General Electric could no longer get loans to float their production cycles. We also knew that the situation was getting bad when banks started freezing credit lines to the automakers. And when the State Of California could not get loans to carry the state through the course of a single economic year, we knew it was ready to hit the fan.
Economic Contraction Has Deep Roots
The lack of business credit is not what killed the auto industry. What brought the automakers to their financial knees was the inability of consumers to get auto loans for new vehicles. This started to happen nearly a year before the commercial credit began to dry up.
When consumers could no longer get loans for major purchases, the economy began to contract significantly, as manufacturers could no longer sell products already in inventory.
As major manufacturers begin to fall by the wayside, the ripple effects hurt hundreds of other businesses, employing thousands.
For every automaker that falls, there are companies that produce tires, car seats, carpet, radios, and automotive parts that will also have to lay off people. The automaker is the easiest example to show the ripple effects of a crumbling economy.
When auto sales fall, car dealerships begin to shut their doors. Dealerships provide hundreds of additional jobs in small towns across America, providing employment for sales people, mechanics, supplies and support. Once you get past the jobs supplied directly by the dealerships, then one must realize that local detail shops generally contract most of their work from car dealerships.
If General Motors fails, jobs are not lost only in Detroit, but in Oklahoma City; Lansing, Michigan; Doraville, Georgia; Ontario, Canada; Spring Hill, Tennessee; Moraine, Ohio; Flint, Michigan; Pittsburgh, Pennsylvania; Ypsilanti, Michigan; and Portland, Oregon. (This list is actually derived from a GM plant closing list from 2005.)
In 2008, GM also closed plants in Grand Rapids, Michigan and Janesville, Wisconsin.
As 2009 approached, GM announced further plant closings. When the announcement came in December of 2008, there were 20 more GM plants on the cutting block for temporary shutdown. This round of plant closings will affect plants in the U.S., Canada and Mexico. Specific states affected by these plant closings include plants in Delaware, Maryland and Texas.
Consumer Credit Dried Up One Year Before Commercial Credit Ended
I mostly respect Bill O’Reilly’s view on the world, but one day, he went on a rampage about the economic meltdown, stating that he pays attention to things and did not see the economic meltdown coming. He was complaining that no one warned us of this happening.
I wrote to O’Reilly that day, for the first time ever. I told him that if he watched his own news channel - we knew it was coming. If only he had turned on Neil Cavuto once in a while or watched the Saturday morning business block, then he would have seen this mess coming too.
It all started with a real estate bubble that we all knew was there.
When the real estate bubble began to pop in remote areas of the country and banks started to realize that home foreclosures where on the rise, banks reacted by stopping consumer loans for big ticket purchases, such as homes, cars, furniture and electronics.
The economy began to contract, as consumers could no longer drive the economy unimpeded.
It took business a little while to notice the contraction of business. Most assumed the contraction in sales was more related to the price of gasoline, without noticing that the problems ran deeper than that.
Most business managers assumed that once the price of gasoline dropped back to its historical threshold that all would recover. But gasoline prices only masked the real problem - the lack of consumer credit.
The Roots Of The Real Estate Bubble
The roots of the real estate bubble and subsequent implosion began in the 1990’s. Interestingly, both G.W. Bush and Bill Clinton opposed the policies that created this mess, but both were either ineffective or unable to change the course of government policy in this matter.
Bush and Clinton seemed to agree that the credit practices of Fannie Mae and Freddie Mac were bound to create problems that could not be overcome easily. In the discussion I was listening to about this issue assumed that both Bush and Clinton were “unable” to fix this problem, although both spoke about it regularly.
I tend to find it hard to believe that any President of the United States is “unable” to do anything… but then again, Bush was “unable” to address the political hot potato of Social Security in his second term.
In the early 1990’s, the role of Fannie Mae and Freddie Mac was changed from helping the underprivileged to buy a home, to guaranteeing banks that wrote loans to anyone and everyone who wanted to buy a home.
Fannie Mae and Freddie Mac began buying loans from banks, packaging those loans, and selling them to investors. Ah… you see the connection… you have heard about that stuff on the news… Good.
Since bank interest rates were so low, banks and mortgage brokers soon realized that they could not make their money collecting interest. So, they began the transition to selling loans to consumers based on closing costs. So long as the consumer could meet and pay for the required closing costs, then the bank would be able to write a loan to the consumer.
If that loan to the consumer was for a home, then the bank could sell those loans to Fannie Mae and Freddie Mac, who would then package a group of loans to sell to investors.
Here is where the story goes south.
Since banks were selling loans only for the closing costs and selling the loans to a third-party investor, banks stopped looking at whether an individual could afford the loans being given to the consumer.
You know, if I can only afford $900 per month on my mortgage, what makes anyone believe that I can repay a mortgage worth $1200 per month?
Within the system as it was constructed, the bank could care less if I could afford to pay $1200 per month. They only cared that they could sell me the loan, get their closing costs, and then they would pass the liability of my problem loan to a third-party investor.
Because the bank had no financial interest in my ability to repay the loan, they did not concern themselves with writing loans that could be afforded by consumers.
As a result, banks lined up to write consumer loans that consumers could not afford to repay. (We can also slap the consumer at this point, because the people who took those loans also knew that they could not repay them.)
The Contribution Of The Consumer
Each consumer who took a mortgage they could not hope to repay contributed to our current economic meltdown.
I know that many felt strongly that they could repay the loan or that they could get a salary increase to help ends meet. But when consumers are struggling to get by, it only takes one unexpected car repair or other large expense to bring the house of cards tumbling down. The end of the road could also come as soon as one got sick enough to miss a couple days of work.
The consumer should have known better than to take the loans they were offered. But many people also expected that banks still worked the way they did in the 1970’s and 1980’s - making sure that consumers could afford a loan, before offering that loan.
Lining Up The Dominoes
Consumers had taken loans that they could barely hope to repay. But when an unexpected expense came up, people began to get behind on their mortgage payments. Eventually, the added pressure of being behind on payments pushed consumers to cut their losses and default their home mortgages.
Of course, this process was accelerated when the real estate bubble burst and homeowners began to realize that they owed $120,000 on a home only worth $100,000!
As consumers began to default on their home mortgages, banks started to tighten up their credit policies on other large consumer loans such as cars, furniture and electronics.
As consumers became unable to get loans for the things they desired to purchase, manufacturers and retailers began to struggle under slowing sales.
Slowing sales further complicated the issue, because banks began to realize that their business clients were having a harder time paying back business loans.
At this point, the banks worried about their business clients, but they did not close all commercial credit just yet.
Like you and I, banks borrow money from each other, in order to enable ensure that bank liquidity is maintained. In the banking industry, the government requires that a bank always has cash-on-hand to match 10% of the total loans it has in the marketplace.
On days like payday, banks will often borrow enough money from another bank to help them cash all of the checks that will be brought to their bank. They borrow that money to be able to meet their cash needs, without tapping into the money in their safe that is required to meet federal lending standards.
Of course, banks will cash a check on Friday and they will have that money back in their own coffers by the following Wednesday, when the employer’s bank is able to send the money back to the bank who cashed the check. Within the banking industry, few-day loans and one-week loans between banks are common for this reason.
It did not really hit the fan until banks stopped loaning money to each other. When the investment banks began to fall, other major banks also began to fail. With banks failing everyday, bank managers began to wonder about the banks to whom they loan money.
Fear crept into the bank-to-bank lending cycle, and bank-to-bank credit came crashing to a halt.
This is the point where commercial credit died. It was September of 2008 - only weeks before the Presidential election. John McCain handled himself badly during this time frame, ensuring that he would forever be only a footnote in history. “I am suspending my campaign to focus on this problem,” - John McCain, famous last words of the top dunce of 2008.
When banks stopped lending to each other, other banks had to freeze commercial credit lines. When General Electric’s top lender was unable to get bank-to-bank loans, it was unable to loan money to GE, regardless of their belief in GE’s ability to pay back the loan.
The Fallout Is Wide And Painful
When GE can no longer get loans to finance the manufacturing cycle of their products, then GE is forced to lay off workers.
When the automakers customers cannot get consumer loans and the automakers cannot get loans to keep them afloat during this economic downtown, the automakers are forced to lay off people. Along with the automakers laying off people, part suppliers and dealerships also have to lay off people.
When the State Of California cannot get loans to keep the state operational until tax payments start coming in, Governor Schwarzenegger has to make some hard decisions, stopping certain government services and stopping production of development projects. Of course, Schwarzenegger does not have the political courage to fix the problem, but only to survive the crisis. Either way, money stops flowing in California from government coffers, leading to taxpayers receiving IOU’s from the California tax agency and people losing their jobs in state construction projects.
The Downward Spiral
Consumers cannot borrow money to buy consumer goods, which in turn slows sales at major manufacturers and major retailers. Slowed sales leads to more layoffs and fewer jobs. Slowed sales also leads to lower stock prices and fewer stock dividends.
Sometimes the pain felt at the business level leads to business failures, which in turn leads to more lost jobs. Fewer jobs leads to more defaulted loans and home foreclosures.
It is a cycle that is hard to break.
According to a story by the Fox Business Network last week, American consumers have lost $11 trillion dollars in their net worth over the last one year.
Is there a light at the end of the tunnel? Certainly there is, although it is a bit hard to see right now. Every down cycle in an economy ends with an up cycle. It is just that we have yet to discern a bottom in this economic downturn, so it is hard to predict when recovery will come.
I am an optimist by nature. I see good days ahead, although those good days will necessarily be preceded by some pain.
The best advice I can give anyone in this current recession is to only spend within your means, until this economy recovers its vitality. At my house, we are still spending, but we are not doing it with credit. Instead, we are paying cash for what we want and making darn sure not to increase our debt load during this down cycle.
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Arlo Mooney writes about the economy and credit. The only loans he will consider at this time are short term loans, in the form of payday loans or cash advance loans to bridge a cash shortage until the following payday. You can read more of Arlo’s work at: http://cash-advance-payday-loans.org/blog/
Tags: business credit, causes, commercial credit, consumer credit, credit crisis, economic, economic downturn, economy, foreclosures, history, loans, recession, root
Everyone is talking about the difficulty of borrowing money right now during the current credit crunch. But I have learned from my unique experience that there is still money available to borrow, even in these current market conditions.
Consumer credit for auto loans and home mortgages is kind of scarce, because the major banks who have historically loaned this money are struggling under a mountain of bad loans.
Despite the contraction of consumer credit through the various nationwide banks, there are banks that are still loaning money to consumers. If you stop to think about the facts of this matter, what I am getting ready to tell you will make good sense.
The Banking Industry
There are hundreds of major banks which made loads of money during the last couple decades - banks that loaned money to pretty much anyone who filled out a credit application. These banks are now struggling with record bank loan defaults. As such, they do not currently have the economic strength to be able to loan money now. These troubled banks started tightening the reigns on their lending practices, when they realized how bad the situation had become.
Despite all of the bad news in the consumer credit industry, there is a lot of good news, but you will never hear the good news when reading the newspaper or watching your favorite news show.
See, while there were hundreds of major banks that loaned money to absolutely anyone who asked for it, there were also hundreds of other banks that did not diminish their credit standards, in order to loan money to people who could not afford to pay back the loan.
As a result, there are thousands of smaller banks and credit unions that have strong financial portfolios, permitting them to loan money freely during the current credit crunch.
So, if you need a loan right now for a car replacement, you should visit your local banker to see if they would be willing to loan you money for that purchase. You might just be surprised. I know that here where I live, there are at least three banks that would be willing to loan me money for the purchase of a new car, if I wanted to purchase a new car.
The Private Lending Industry
A friend of mine buys and sells homes for a profit. Of course the current economic conditions are good for his business in that there is a lot of opportunity to buy homes for a deeply discounted price. But as with any business, one needs to have access to capital to keep moving forward and to take advantage of opportunities when they come.
My friend talked to a potential investor this morning who told him that if my friend could provide him houses, then the investor could supply the purchase price of the home within 24 hours!
My friend has bought and sold nearly four dozen homes in the last six months, and his home investors have what seems to be an almost unlimited access to capital to invest in the homes he buys.
So while Wall Street and major banks struggle to provide money to borrowers, private lenders seem to have no problem getting the money they need to buy homes or anything else.
The Small Consumer Loan Industry
As I have demonstrated earlier in this article, the credit crunch is only affecting those banks and lenders which used bad judgment in their lending practices.
The cash advance payday loan industry has not been as foolish as the major banks have been, and that really says something. The cash advance payday loan industry loans money to absolutely anyone who walks through the door who has a job and a checking account. And yet, their books remain stronger than the books of some of the major banking institutions. This story is just dripping with irony, isn’t it?
It might help that the cash advance payday loan companies charge a bit more money for a loan and that they loan smaller amounts of money for less time than the major banks do.
Although these loans are not for everyone, they are loans for people who have experienced a short-term cash shortfall. If you can afford to pay back your loan in two weeks, when the loan becomes due, then the payday loan company could provide to you much needed cash in your time of need.
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With Arlo Mooney’s background in finance and economics, he strives to help people understand complex economic principles in simple terms. If you want to learn the inside story of the September 2008 economic collapse, read more at: http://cash-advance-payday-loans.org/blog/
But if you are looking for a payday loan, Arlo recommends http://www.fastcash4all.net/
Tags: bank loans, banking, Banking Industry, cash advance loans, consumer loans, lending, loans, payday loans
When the phone is ringing every day and the bank is threatening to foreclose your home, because you are behind on payments, it is easy to believe that the banker is drooling over the possibility of foreclosing on your home. But you should know that the bank stands to lose a lot of money if they are forced to foreclose on your home. Read this article to learn the real truth about banks and foreclosures.
With what I have learned about banks and foreclosure over the last couple years, the information that I am about to share with you now, could have helped a few of my friends avoid losing their homes. Because I could not help them in their time of need, it is my hope that I could help you now, in your time of need.
I know that my initial suggestion that “banks do not want to foreclose on your home” may seem far-fetched to you now, but by the time you have read this article in full, you will recognize that you have more power over the bank than the bank would care to admit to you.
The Truth Is In The Numbers
Let us suppose for the sake of this story that you paid $100,000 for your home. And let us suppose that you put a full 20% down on that home five years ago. In this scenario, your bank loaned you $80,000 to help you purchase your home, and at best, you have probably paid $10,000 towards the principle of your home loan.
In the past year, you suddenly found your finances stretched for one reason or another. Perhaps you changed jobs, or your business contracted with the economy. Perhaps you had a financial emergency that required a lot of cash to solve, and now you find yourself struggling to catch up on the rest of your bills.
In the end, it really does not matter the reason for your current financial crisis. It will have little bearing on the outcome of this story.
This is where most people make a mistake in their understanding of the banks’ motives in threatening foreclosure. The bank is not threatening foreclosure because they want your house. The bank is threatening foreclosure, because they want to spur you to action, to fix your current financial crisis.
I know you are thinking that the bank will sell your home for its full retail value, but they won’t, because they cannot afford to hold onto your house for a long period of time. In order to sell a home for full retail price, the bank would need to commit to holding the home, perhaps for years, until that perfect buyer arrives to buy it.
If you force your bank to foreclose your home, your bank will put your house up for auction at a sheriff’s sale. PAY ATTENTION… this is important. When your bank puts your house up for auction, they will generally only get 35 to 40 cents on the dollar for your home.
The bank is currently out 70 cents on the dollar against the retail value of your home, but if forced to auction, the best the bank can expect to get out of your home is half what the bank has invested into your home!
In the scenario I have outlined here, you owe $70,000 on a $100,000 home. But if you force the bank to foreclose your home, the best the bank can hope to achieve is to get $35 to $40,000 for your home at auction. Do the math. If your bank forecloses your home, your bank will lose between $30 and $35,000, when they sell your home. Ouch!
This is the key information that you will use to stop the foreclosure of your home. As you can now recognize, your bank needs you to stay in your home, more than they desire to foreclose on your home.
Leverage
As should now be obvious, you as the homeowner have a lot of leverage over your bank. And if you play your cards just right, you will not have to lose your home.
If you find yourself behind on payments and you are looking for a way to save your home from foreclosure, you need to speak to a company like National Foreclosure Counseling Services (http://nfcscorp.com/). NFCS is a company, which can help you negotiate a repayment plan or loan modification on your behalf.
When NFCS contacts your bank on your behalf, your bank knows that you are interested in taking whatever steps are necessary to get back on the straight and narrow with them. When banks realize that you are serious about staying in your home, they have to weigh the options of negotiating a loan modification or losing an average of $30,000 when they foreclose your home.
If the bank has someone in a home that wants to stay in the home, then the bank stands a chance of retaining some of their profits on their original loan, if they are willing to renegotiate the terms of that loan. However, if the bank is forced to foreclose on the property, then chances are good that the bank will lose a lot of money.
Think about it. Your bank does not want to foreclose your home. It is in the best interests of your bank to keep you in your home, period.
National Foreclosure Counseling Services (http://nfcscorp.com/) has a proven track record (with documentation) of helping families such as yours renegotiate with their banks to help them to stay in their homes. In just the last 90 days, NFCS has helped 600 families renegotiate with their banks to avoid foreclosure.
The Most Important Step In This Process
You have the power to save your home from foreclosure, if you simply decide that you want to exercise your power of self-determination.
Who knows? You may have decided that you don’t want to try to hang on to your home for whatever reason. So long as you understand that a foreclosure will hurt your credit for at least ten years, perhaps preventing you from being able to buy another home, then by all means, it is your choice to accept foreclosure or not.
The current real estate crisis will not last forever, and housing prices will rebound eventually. Even if you see yourself upside-down in your home now, you may just find that if you hang on to your home another five or ten years, then housing prices will bounce back and you will survive the current real estate crisis without great financial loss.
But if you are like most people, you probably cannot bear the thought of losing your home and the equity you have so far built up in your home. If you desire to hang on to your home, then you alone must take that first step towards saving your home from foreclosure. You must either visit the NFCS website at (http://nfcscorp.com/), or you should call NFCS at: 1-800-824-4459.
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My name is Arlo Mooney and I write about financial issues for The Financial Side of Economics blog.
Tags: banking, banks, foreclosure, foreclosure prevention, foreclosures, losing money, mortgage, National Foreclosure Counseling Services, NFCS, stop foreclosure
