Tighter credit squeezes borrowers

Credit -- the grease that lubricates the economy -- is in short supply now and apparently getting even shorter. For ordinary Americans, it's gotten to the point where even people with money in the bank, steady paychecks, good credit ratings and long histories of paying bills on time are getting turned down for loans or asked to pay punitive interest rates. The same is happening to businesses looking to expand.That's creating a huge drag on economic activity, making it harder for households and businesses to finance spending. It has become one of the most important factors holding the economy down. And tight credit is a key reason the federal government seized control of mortgage giants Fannie Mae and Freddie Mac on Sunday.With lenders reeling from the housing collapse and loan losses mounting, the crunch is intensifying, economists say. That foreshadows a long and difficult stretch for households and businesses, as loan markets struggle to regain footing.What started out more than a year ago as a lender panic over mortgages has worked its way through the gamut of business and consumer finance. The result is that all kinds of loans, from mortgages to student loans to credit card debt, have become scarcer and more expensive."Credit is just plain hard to get. There's not much availability, and it comes at a very high price," said Jim Wilcox, an economist at the Haas School of Business at the University of California Berkeley. "Consumers are less able to buy new cars or go on expensive vacations. This is hurting employment and hurting the economy very broadly."Every quarter, the Federal Reserve surveys loan officers at more than 80 large banks. The last survey, in July, found one of the broadest movements toward stricter credit standards ever reported.About 75 percent of the banks indicated they had tightened requirements on prime residential mortgages in the past three months. Two-thirds said they had clamped down on credit cards. A similar proportion toughened criteria for small-business loans.Consumers are experiencing this crackdown in a variety of ways. Mortgages and student loans are harder to get and command higher rates relative to benchmarks such as the prime rate than they have in many years. Mortgages, of course, have become more expensive because it's harder for lenders to sell them to investors. The huge loan losses posted by Fannie Mae and Freddie Mac, which buy mortgages and repackage them for sale to investors, have forced the two mortgage giants to cut back their role as middlemen, putting upward pressure on rates. Thirty-year fixed-rate mortgages average 6.2 percent, up from about 5.8 percent at the end of March, according to Bankrate.com. Government guarantees for Fannie Mae and Freddie Mac could help the mortgage market, but it's not clear how much or for how long. Credit lines on home-equity loans and credit cards are being slashed. A survey of more than 1,000 people nationwide conducted by the San Francisco group Consumer Action found that almost 10 percent had had credit card limits lowered in 2008. And rates on credit card balances are getting boosted even for customers who follow the rules.-- Ross Turner, 47, an Oakland, Calif. graphic designer, was turned down for a credit card earlier this summer by Redwood Credit Union, where he had been a customer for 14 years. Redwood told him he had too much debt for his income, even though he had no outstanding loan balances and earned about $86,000 last year. He said he was finally accepted after he trimmed his request for a $25,000 line to $5,000 and explained that he had a partner who shared rent on their apartment."When I approached my credit union, I was thinking it would be a slam dunk," he said. "I was just blown away."-- Tim Yates, 43, of Lake Oswego, Ore., a graphic designer, received a direct-mail offer for a $50,000 home-equity line from Citibank. He thought there would be no trouble qualifying, because he owed less than half the value of his house. But about a month ago, he was turned down."They said they couldn't give me credit, and that had never happened to me before," he said. "I was just shocked, but they said the rules had gotten a lot tighter."Lenders say they are tightening standards to control risk of losses, which seems prudent at a time when defaults on mortgages and many other kinds of loans are rising rapidly. For example, a spokeswoman for Bank of America said the bank sometimes raises rates on credit card balances for customers who have multiple accounts and are drawing on substantial portions of the lines available to them. Consumer advocates question whether it's wise to raise rates on vulnerable customers, an action that could push someone over the edge.In other cases, lenders haven't gotten stricter, but falling home prices and a weak economy make it harder for customers to meet loan qualifications. E-mail Sam Zuckerman at szuckerman(at)sfchronicle.com.(Distributed by Scripps Howard News Service, www.scrippsnews.com.)