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2008-10-13 08:33:14
By ADAM GELLER, AP National WriterSun Oct 12, 9:48 PM ET
An inflatable gorilla beckoned from the roof of Don Brown Chevrolet in St.
Louis, servers doled out free bowls of pasta and a salesman urged potential
customers to "come on up under the canopy and put your hands on" a new set of
wheels.
But sitting across from a salesman in a quiet back room, Adrian Clark could see
it would not be nearly that easy. This was the ninth or tenth dealership for
Clark, a steamfitter looking for a car to commute to a new job. Every one
offered a variation on the discouragement he was getting here: Without $1,000
for a downpayment, no loan.
"It's just rough times right now," Clark said. "Rough times."
For Clark, and for a nation of consumers heavily dependent on credit, there are
growing signs that those rough times could prove to be more than just a
temporary problem, that they could be the beginning of a stark, new reality.
Is America's long era of easy credit over?
Experts say that even when the current credit crunch eases, the nation may
finally have maxed out its reliance on borrowed cash. Today's crisis is a
warning sign, they say, that consumers could be facing long-term adjustments in
the way they finance their everyday lives.
"I think we're undergoing a fundamental shift from living on borrowed money to
one where living within your means, saving and investing for the future, comes
back into vogue," said Greg McBride, senior analyst at Bankrate.com. "This
entire credit crunch is a wakeup call to anybody who was attempting to borrow
their way to prosperity."
A prolonged period of tighter credit is ahead, experts say.
U.S. consumers will find it much harder to get a credit card, and to carry
large balances. Late fees will rise and lines of credit will be reined in.
After years of buying homes with interest-only loans, or loans that allowed
people to borrow more than the value of the home, substantial payments and
downpayments will be required. Interest rates are also likely to rise.
Lenders, far more wary of risk, have tightened the standards they use to judge
potential borrowers. Regulators will be looking over their shoulders.
The changes cap three decades in which U.S. consumers along with businesses
and government have run up ever-increasing debt. Americans became accustomed
to financing purchases large and small with plentiful credit cards, easily
approved loans for cars and the latest conveniences, and by siphoning the
equity in their homes. Lenders did far more than just make credit plentiful.
They aggressively marketed it as a necessity, a way for the smart consumer to
leverage themselves into a better lifestyle.
The financial meltdown has made clear the role an increasingly global economy
played in facilitating U.S. consumers' borrowing, with banks packaging and
selling debt to investors, providing cash to people who once would have been
considered too risky to get a loan.
The expansion of credit has, in many ways, been a good thing. It has allowed
many more people to buy homes. At a time when household incomes have stagnated,
borrowing has made it possible for many people to afford purchases and cover
short-term expenses they might otherwise have had to delay or abandon.
But all that borrowing came at a heavy cost.
Americans are more reliant on debt then ever before.
The portion of disposable income that U.S. families devote to debt hit an
all-time high in the second half of last year, topping 14 percent, figures from
the Federal Reserve show. When other fixed obligations like car lease
payments and homeowner's insurance are added in, about one of every five
household dollars is now claimed by bills.
The credit card industry lobbied heavily in 2005 to tighten bankruptcy laws to
make it more difficult for consumers to seek court protection and shed
responsibility for paying off debt. But in a sign of just how much households
have become dependent on borrowing, the average amount of credit card debt
discharged in Chapter 7 bankruptcy filings has tripled to $61,000 per person
from what it was before the law was passed.
"We are going to have to cut back," said Dean Baker of the Center for Economic
and Policy Research, a Washington, D.C. thinktank. "We've really been living
beyond our means."
Americans, borrowing to cover ordinary living expenses, have all but
abandoned saving.
The U.S. personal saving rate dropped to well below 1 percent in late 2007 and
early this year, according to figures from the federal Bureau of Economic
Analysis. The figure has edged up in the last few months, but the actual
savings rate may still be near zero, given that many people are covering living
costs by using credit cards or money saved earlier, according to the BEA. The
lack of savings is a sharp contrast with the decades after World War II.
Americans routinely saved more than 10 percent of their income in the early
1970s.
Now, many families spend virtually all of their incomes covering living
expenses, and even that is not enough.
"In the credit era, which is like living on steroids, you're not saving money,
you're not breaking even. You're actually borrowing 20 to 30 percent," said
Robert Manning, author of "Credit Card Nation: The Consequences of America's
Addiction to Credit."
The new era of tighter credit will largely be a mandate, as consumers are
forced to adjust to tougher rules and tighter limits. But consumers have also
begun showing signs of a change in mind-set, putting off purchases, buying less
expensive substitutes, going out to eat less, and rethinking their propensity
to do so on credit.
Consumer borrowing fell for the first time in more than a decade in August, the
Federal Reserve reported this week. The decline, at annual rate of 3.7 percent,
reflected a sharp drop in the category of borrowing including auto loans and a
smaller decline in the category including credit cards.
The tightening of credit will force American families to cut their spending,
mindful of their current paychecks instead of borrowing against future ones,
said Frank Badillo, senior economist with TNS Retail Forward, a consulting and
market research firm in Columbus, Ohio.
"We're going to see some fundamental changes in consumer behavior," he said.
Badillo and others compare the psychology to the way people reacted after
gasoline reached $4 a gallon last summer. Prices have eased considerably since
then, but consumers seem to have decided that the good old days of very cheap
gasoline are over. In response, people have moved to buying smaller, more
efficient cars, and trying to reduce the miles they drive. Demand for homes in
outlying suburbs has declined.
Like gasoline prices, the availability of credit should improve once the
current crisis eases. But consumers are confronting what some see as a
long-term change.
After years of living off one income and drawing on credit to fill the gap,
Portland, Ore., legal assistant Susie Shepherd and her partner, Kaite Chase,
are rethinking their finances. In the past few years, they regularly ran up
debt to pay Chase's tuition and repeatedly refinanced their home, pulling out
equity to pay bills and drawing on lines of credit to cover expenses.
But Shepherd was caught short this fall when her brother asked for help in
paying moving expenses. She tried to draw on a credit card, but found her line
of credit had been cut in half. The only way to help, the couple decided, was
to sell some household items.
"We'd been living on credit for so many years," Shepherd said.
Borrowing against the future has always been part of the American story.
"How did those religious English people get to this country on the Mayflower?
They came on what we would call the installment plan," said Lendol Calder,
author of "Financing the American Dream: A Cultural History of Consumer
Credit."
But the Great Depression chastened consumers. After World War II, and the
explosive growth of the suburbs, consumption rose sharply. But the modern era
of easy credit really began with the deregulation of the late 1970s.
In a 1978 Supreme Court decision, banks won the right to charge whatever
interest rate their home state allowed and to do so across state lines. States
repealed usury laws capping interest rates. Banks began pursuing consumers in
ways they hadn't before.
When inflation soared in the early '80s, banks aggressively marketed credit
cards to struggling consumers as a good deal. The interest rates were high, but
not as high as inflation. In the recession of 1990-91, banks who saw their
profits tightening seized on the margins available by lending more to
consumers. When Congress eliminated income tax deductions for interest on
credit cards, banks pushed home equity loans, encouraging people to take money
out of their homes to pay off the credit cards.
As families took on debt, they were encouraged to follow a rule of thumb: It's
OK as long as you don't devote more than 25 percent of income to borrowing
costs.
Lenders, though, found a way around that. The 20-year home loan was repackaged
as a 30-year loan and lenders stretched three-year car payment schedules to
seven, masking the extent of the debt load.
Consumers "think they're doing fine by their parents' standards," Manning said.
"But boy, have they fallen far behind."
The industry came up with subprime loans in the 1990s, then used them to
encourage consumers with checkered credit history to buy homes. When very low
interest rates early this decade sent home prices skyrocketing, and Wall Street
demanded even more lending to feed a market for mortgage-backed securities,
lenders went into overdrive. Consumers could buy with no money down and no
documentation of income and were encouraged to borrow against the rising value
of their homes.
Before the housing bubbled popped, many consumers were pulling money out of
their houses to pay for expenditures from boats to big-screen TVs well
beyond ordinary living expenses.
Over the years, economists have tried to figure out when, if ever, consumers
might finally reach their debt limit. But each time, Americans have proven far
more resilient than pessimists imagined, financing their spending by borrowing.
The credit crunch, though, may be the breaking point.
Dolores Holmes took out an interest-only $515,000 loan two years ago to buy a
bed and breakfast in Lambertville, N.J., a Delaware River town popular with
weekend antique hunters. Once the business took root, she planned to refinance
into a fixed-rate loan and cut her cost. But as the economy declined, she had
trouble filling rooms.
That increased pressure on her to find a way to cut her mortgage payments. But
her accountant and financial adviser say her hopes of getting a more affordable
loan are slim without a profit that convinces a lender she's worth the risk.
"I've been cutting back on anything personal," she said. "It's like everything
I have has to go back into the business."
In Kansas City, Mo., David and Norine Piet were surprised to get a letter in
September from USAA Federal Savings Bank that it was freezing their $40,000
home equity line of credit. The bank told the couple it was doing so because
their home's value had plunged from $310,000 to $141,200.
The couple had been poised to refinish their basement to add a bedroom and make
it suitable for visitors a place to have people over and play cards, shoot
pool and cook. Now that plan has been shelved.
"It's kind of like we had this $40,000 cushion there, that if anything happened
we had an emergency fund," David Piet said. "At least we had a source of funds
there, and now that's gone. That has caused us to cut back and try to put more
money into savings, and be cautious on what we're spending money on."
The Piets are comfortable enough financially to have retired early. But for
consumers of more modest means the new restrictions on credit are cutting into
their ability to make what would have been relatively ordinary purchases.
Clark, the steamfitter shopping for a car, returned home to Fairview Heights,
Mo., in January after a 12-month tour of duty with the U.S. Army in
Afghanistan. He found a new job and expected that a regular paycheck would be
enough to secure a loan for the car he needs to commute.
At the dealership last weekend, Clark and his wife, Flora Rivera, settled on a
Dodge Stratus with 8,000 miles on the odometer. But the dealership was looking
for a $1,000 downpayment and Clark had just $200.
The problem is that Clark, 22, has almost no credit history, a problem
compounded by the time he spent serving overseas. A few months ago, multiple
banks would have been happy to give such a consumer a loan, salesman Scott
Ziegler said. But now only companies offering pricier subprime loans are
interested, and that still doesn't solve the problem of the downpayment.
Clark left the dealership without a loan, but decided to put down his $200 as a
deposit and try to find another source for the remainder of the downpayment. In
recent weeks, such scenarios have become the norm, said the dealership's loan
manager, Jarrod Campbell.
"I'm getting a lot more customers who are saying, 'I've been to 10 other car
lots,'" Campbell said, "and no one will give me a loan."