Just when you need credit the most it’s becoming more elusive. Americans have always depended on the equity in their homes as a slush fund for an emergency or big-ticket items like tuitions and home repairs. But now, with millions of us out of work, tapping a home’s equity may not be an option.
A few weeks ago, we talked about maintaining a good credit score during these difficult times. As part of the stimulus package, credit cards, auto loans and mortgage loans can take a pause in payments to give consumers some time to get through the pandemic and back to work. The law says lenders that allow borrowers to defer payments can’t report this information to the credit-reporting companies, however, these delays are still having an impact on the credit market in general.
Bankers and lenders are having a difficult time determining who among loan applicants actually has good credit, assuming that not all of the information is being reported. Therefore, they are approving fewer forms of consumer debt. In particular, home-equity lines of credit are being pulled back by lenders just at the time when Americans may be looking for emergency money.
Lenders are trying to protect themselves from the big losses they experienced during the 2008 financial crisis when the real estate market took a dramatic downturn. If you remember, that was when homeowners were using their home’s equity like an ATM machine, and when the crisis hit, the value of the home was underwater and many were foreclosed, leaving the banks and the American taxpayers holding the bag.
Helocs, basically a credit line, and home equity loans are becoming harder to come by as lenders tighten up their application process because of job loss and the potential of home values falling. People who have lost their jobs may no longer qualify, in addition to the difficulty of performing appraisals during the pandemic. Lenders are also raising the credit scores they are willing to accept and/or decreasing the amount of money they’re willing to loan.
Even personal loans, which were always available with shorter repayment terms and higher interest rates, are tumbling. According to Equifax, there were an estimated 79,000 personal loans completed in mid-May compared with 226,000 in mid-March. In addition, new auto loans and leases as well as new credit cards were all down substantially.
With the economy in total confusion, lenders can’t tell if a borrower who has opted to take a deferment of their loan is doing so because of lost income or if they’re simply taking advantage of relief options. Naturally, lenders are taking a very conservative approach to making loans, another reason why consumers should not take a pause on any of their credit cards, auto loans and certainly not their mortgages if they can afford to pay during these times. This action could catch up with them down the road no matter what the federal government’s intention was.
Meanwhile, housing inventory all around the country is dropping, falling 19.7% at the end of April, and the shortage of available properties will surely increase. Of course, the result is home prices moving up – 4.7% at the end of April – since those who can afford to purchase even during these times are looking at historic low interest rates and are taking advantage.
Like many other national disasters we’ve faced, this too shall pass, but not without a lot of financial damage to business and individuals. When the lenders start getting in gear again, they’ll be looking for customers so hopefully homeowners can hang on until then. Stay safe.
