Who’s getting loans today?
Over the past few weeks, we have watched executives from just about every major bank sit in front of lawmakers in Washington DC to account for what they have done with the TARP money that was allotted to their banks. Across the board, their answer was the same, “We are making loans.” They make it sound like bankers are waiting with open arms for customers who need to borrow money.
At the same time, statistics show that one in six consumers has been denied financing in the last six months. Even worse, for households making less than $50,000 annually, one in four has been denied loans. To talk to many consumers today, you would think that it’s almost impossible to get a loan.
So who is telling the truth? Are the banks making loans, or are consumers having a nearly impossible time finding credit? The answer is probably that both are telling the truth. Banks are making loans, although with much higher scrutiny for borrowers and on a more limited basis than previously. And borrowers are definitely having a hard time finding the financing they need.
The truth is that the people getting loans today are really the people that don’t need to borrow money. If you’re a high net worth individual with a strong personal balance sheet, a stable job that pays well, and a high credit score, you can probably get a loan just like you could before credit markets froze up. Before the fiasco in the credit markets, just about anyone could get a loan without too much effort or scrutiny.
Another reason it seems like lending is lower is that a number of buyers of bank loans, such as hedge funds, insurance companies, and money market funds, are no longer in the market to buy loans. Their absence as buyers in the financial system makes it more difficult for credit to flow between banks and consumers because banks have traditionally been able to count on a secondary market for the loans they make.
The numbers that the panel of bank executives shared with lawmakers regarding the billions of dollars worth of recent lending activity are probably true, but it sure doesn’t feel that way for the average bank customer.
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