Consumer, financial institution lending woes complicate economic downturn
The way banks and financial institutions loan money may appear simple to Carbon County residents.
In its basic form, the practice is. But there are numerous nuances thrown into the mix that complicate lending and finance.
In the last year, housing markets in many places in the country have crashed because of the types of loans consumers have taken out on property.
Before the crash, home ownership across the United States slightly exceeded 70 percent. Traditionally, the level has been 60 percent or less.
A significant portion of 10 percent increase was due to new lending vehicles devised by financial institutions and the fact that many consumers were buying houses on speculation or the belief they could make money on the dwellings.
The problem with the market arose when property values started to fall and many consumers owed more than the homes were worth because they had made the purchases without putting money down on houses.
Speculation in the real estate market is not a new concept.
At one time, homes were primarily purchased because people needed a place to live. During long periods like 10 or 20 years, people living in the houses gained equity in the residential property. Some consumers could see that buying homes and holding onto the private residents for a period of time was a profitable venture.
The problem in the last few years was the idea of flipping or selling homes shortly after the houses were purchased for a profit.
In some areas of the country, home inflation was growing so fast that new types of financial transactions were taking place.
"We have an employee here who recently came to us from the Phoenix area," said Errol Holt, manager of Zions Bank in Price. "He told me that while working in banking there, the companies had actually come up with paperless mortgages because some houses were sold within a month before paperwork could even be completed."
But when the inflation bubble started to collapse, people holding a number of homes were being stuck with the properties, unable to make the payments and sell the houses for what they owed.
Also caught in the downward spiral were the regular homeowners who had purchased houses with what was called sub-prime mortgages.
Sub-prime mortgages were given to people with questionable credit or an inability to make payments from the amount of money the individuals actually made.
Some of the loans were made so that the consumers' payments would be low for a while, then balloon at some point to make up for the years of low payments.
The financial practice focuse on the hopes that consumers with the loans would improve their earning power.
Other loans were based on flexible interest levels that change depending on the standing rate charged by the mortgage companies at any one time.
Thus, the consumers' loan payments went up and down based on rates.
One questionable method used to loan money to people was for underwriters to take stated earnings as the basis for consumers being able to manage mortgage payments.
Purchasers who did not have adequate incomes to get into the houses they wanted with traditional loans may have viewed the practice as a favor to them. But in the long run, it hurt many home buyers.
Using basic standards for debt to income ratios went out the door with many lenders. Therefore, people ended up with payments registering at 50 percent or more of what their household incomes actually were.
In a growth market, some of the consumers could handle the situation for awhile. But when the market declined and jobs were lost, the financial drain became a nightmare.
Falling real estate values in many major markets and high fuel costs which have led to increased prices on almost everything consumers buy have compounded the financial situation.
And for many people, the ability to borrow money to do what they have always done has fallen apart.
Many financial institutions have frozen credit card limits. Companies have even fixed or taken away home equity lines of credit which many people used to rely on if they fell into some kind of personal crunch.
Financial institutions lend money to make money. Loan revenues go into the economy. But once in the economy, the money has more power than the original amount of the loans.
At a savings institution, loaned money comes directly from consumer deposits depending upon established policies.
However, many banks currently in trouble borrowed money from other financial institutions to make loans to applicants.
When things went south, the banks were stuck with loans that weren't being paid. The banks also owed money to other financial entities.
"It's all about capital and the availability of capital," said Holt. "In our case, we concentrate on deposits rather than on borrowing money to loan."
Many financially sound banks do the same thing.
But not all banks and financial institutions follow the same practices or operate in the same sphere of influence.
Editors note: Today's story is the second of three articles concerning the global banking system and how it affects the economy as well as the average person.