Lending Or Not That Is The Question?

Granted this is bad Shakespeare paraphrasing but it raise the point of what is happening in lending today. In a Reuter's article "Bernanke says spurring credit key to rebound" the Fed Chairman makes the point that credit needs to be extended. However, he also indicates that at this time banks are not lending. No segment of the lending world appears to be allowing people or companies to borrow money. Clearly the Federal Reserve wants banks to provide access to capital or credit to companies and individual, however, as far as I can tell this is not happening. A month ago, Wells Fargo announced that it was closing 638 branches and terminating 3800 loan officers New York Times article "Wells Fargo & Company". Most financial institutions are making qualifying for any type of credit very difficult. Currently banks prefer to borrow money from the Federal Reserve at close to 0% and buy treasuries returning between 3% and 4%.

Based on historical evidence we can make the argument that banks and institutions have problems understanding long term risks and how to price them. Clearly the difficult situation we are in today is a direct result of not estimating and pricing properly the risks that lenders were taking. More to the point, if lenders do not start to lend soon, then they will increase the risks that the economy is not going to recover and potentially increase their losses. As businesses need credit and cannot get it, they are not able to meet their debt obligations and start to default. The lack of actions by financial institutions and the continued tightening of lending requirements increase the problems that the economy is facing. Thus not lending can become more dangerous than extending new credit.

All lenders should be encouraged to make new loans and new credit should be extended. There are some glimmers of hope, but it is too soon to see if there is a beginning of a change in credit policies. In residential real estate, some jumbo programs are starting to surface. At the same time there is an increase in default in higher priced residential real estate. In commercial real estate, well the picture continues to be gloomy at best. Most financing appears to come from the following sources, the Small Business Administration through their SBA loan programs, Fannie Mae and their multi units' apartment building programs, insurance companies and local and regional banks that were able to make appropriate lending decisions when their competitors were too aggressive.

While some credits are extended in specific areas and to specific borrowers, it is not enough. As mentioned in previous posts some foreign banks, mainly Chinese ones are coming into the US lending market as they believe that there are lending opportunities. The longer the lack of credit is continuing, the longer it will take for the economy to recover. To obtain credit today borrowers need to work with professional who understand the challenges to getting approved. Loan officers cannot just collect paperwork, they need to understand how to prepare a credit file for review and write a credit memo, or they need to work with people that can do it for them. Working with borrowers, I have seen credit approval successes when both credit professional and borrowers were working closely together.

The bottom line in credit today is that there is a lot of confusion and that it may be this way for times to come.