Posts Tagged ‘lending standards’

If Banks Can’t Do Subprime, They Won’t Lend At All

A full third of Americans cannot qualify for a mortgage these days, recent data from Zillow.com and MyFico reveals. Would-be homeowners with credit scores at 620 or below are not being approved for traditional 30 year mortgage, even when they come with a healthy down payment of 25% or more.

In the days of glory before the housing bubble burst, these folks would have been steered into dangerous subprime loans that we know today were doomed to fail. Despite the fact that in most cases, this same group of people would have done fine with a conventional loan,  the banks wanted to increase their profits to extreme proportions.

Today, with foreclosures at record numbers and some banks being left holding the bag, most banks do not want to risk lending to people with low credit scores, all other things being equal. This is particularly troubling since many Americans have seen their credit scores take a hit from the bad economy. The housing market is weak enough, and banks not lending is a major factor in the continuing sluggish growth of the economy.

American Credit Scores: Another Casualty of the Great Recession

A full quarter of American consumers, 25.5%, now have credit scores of 599 or below, according to a recent sampling by FICO Inc.  People with scores this low are unlikely to qualify for any sort of consumer lending. They will be unable to get a credit card, buy a car, or a home.

As unemployment and foreclosures continue to plague the economy, more and more people will lose ground on this important metric for consumer lending. FICO expects the percentage of people with low credit scores will continue to rise in the near term, since credit reporting often lags behind late payments and the economy has gotten no better.

On the flip side, the percentage of consumers with scores of 800 and above has also increased over historic levels to 17.9%.  This means that anyone who has managed to hold on to his job and is still doing relatively well is being very cautious and paying down what he owes.

The effects of plummeting credit scores will be felt for years since banks have tightened lending standards recently. Even people with scores in the medium range of 650 to 699 will find it harder to obtain financing at a decent interest rate. Those with scores below that will be unable to find financing at any rate, and it will take years for them to recover what they’ve lost.

Related articles:

How To Rebuild Your Credit Rating

See Your FICO Score

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