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Government Helps Keep Housing Loans Cheap - If You Can Get One

STEVENSON JACOBS | The Associated Press via YellowBrix

September 21, 2009

NEW YORK — It’s a good time to borrow money for a home, car or small business.

A year after a global freeze in the credit markets prompted massive government intervention to prevent the financial system from collapsing, interest rates remain at historic lows. But banks are demanding more collateral, bigger down payments and detailed financial histories from borrowers.

And that’s for people with good credit. Everyone else need not apply.

The stingy lending is likely to last.

“Banks are going to be in a defensive posture for several years. Most borrowers can’t meet their criteria,” says Christopher Whalen, managing director at research firm Institutional Risk Analytics.

No segment of borrowers has been spared:

_ Nearly seven of 10 mortgage applications were approved and financed during the housing boom five years ago. At the end of 2008, the number was down to five.

_ Revolving credit, which is primarily made up of credit card debt, declined by $6.1 billion, or 8 percent on an annualized basis, in July. That’s a sign consumers are having difficulty obtaining credit and are cutting back on spending.

To be sure, it is cheaper for businesses and consumers to take out a loan today than it was at the height of the crisis last fall.

The average 30-year mortgage rate stands at 5.04 percent, after falling to a record low of 4.78 percent in April. The overnight rate that banks charge each other to borrow money — a key indicator of the credit markets’ overall health — has plummeted. The London Interbank Offered Rate, or LIBOR, stands at 0.29 percent today. It soared above 6 percent last September when fear threatened to choke off lending throughout the financial system.

But those improvements are somewhat misleading. Lending — especially for homes — is being greased by trillions of dollars the federal government has made available to banks.

The Federal Reserve has provided nearly $340 billion in low-cost loans for banks. It has purchased $625 billion worth of mortgage-backed securities to drive down interest rates on home loans. The Federal Deposit Insurance Corp. is guaranteeing about $300 billion in bank debt, which enables banks to borrow at lower rates.

No one wants to see a return to the easy credit that led to the financial crisis. The question is when will credit return to normal — not too loose, not too tight and not propped up by the government?

Not soon, financial analysts and government officials say.

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