Article in Sunday's Arizona Republic: http://www.azcentral.com/arizonarepu...runch0302.html **** Credit crunch clamping down hard Refinancing mortgages and securing loans becoming harder for consumers and businesses to do Russ Wiles The Arizona Republic Mar. 2, 2008 12:00 AM Credit is the oil that greases America's economic engine, and right now, that engine is sputtering. The easy money has evaporated. Credit-card companies are tightening up. Even borrowers with solid credit may have trouble getting home and car loans. Adjustable-rate mortgages are resetting higher for thousands of homeowners, leaving less discretionary income. Most big banks have been battered by their own bad investments. Many are taking the break the Federal Reserve has given them in lower interest rates and are shoring up their finances, not spreading cash around to clients. For Arizonans such as James LaVerdi and Belinda Ziegman, the credit crunch means delays in building or expanding a business. For Diane Valencia, it could mean losing a home to foreclosure. For others, it's a question of slower loan approvals, more red tape or simply opting out of the borrowing process. Tighter credit standards are spreading into commercial loans and other areas, sapping consumer confidence and roiling the financial markets. The Fed has repeatedly cut a key interest rate and will consider more cuts. Congress and President Bush approved tax rebates and other moves to stimulate the econ- omy. It's still too early to tell whether the nation will slip into a recession, yet spending activity clearly has slowed as anxiety has spread. Consumers, many of whom have financed their lifestyles on credit for years, are increasingly wary about major purchases, such as homes and cars, and their hesitancy has echoed across the economy. "People are saying, 'I'll get another year out of this truck or this piece of equipment,' " said Robert Blaney, Arizona director of the U.S. Small Business Administration in Phoenix. "They'll just run it until it dies." Other options range from relying more heavily on credit cards to drawing down retirement accounts. The percentage of 401(k) account holders with loans jumped to 18 percent last year from 11 percent in 2006, according to a recent study by the Transamerica Center for Retirement Studies. Business crunch It's notable that businesses are feeling the pinch from what started as a consumer-borrowing slump. But that's the hallmark of a credit crunch - a spreading of tight conditions throughout the economy. "Things have tightened up very much in the last 60 days," said Robert McGee, president of Southwestern Business Financing Corp., a Phoenix lender. "A lot of business owners are just sitting back, waiting to see what happens next." James LaVerdi of Phoenix feels the frustration. He's a mobile mechanic, and he's been seeking to set up shop in his own facility, either rented or purchased. But he's been turned down three times over the past half-year for loans in the range of $300,000 or so. "We're not talking $10 million," said LaVerdi, a mechanic for more than 30 years. "It's less money than they gave in mortgages to people who couldn't afford the payments." LaVerdi said he has cash to put up as collateral and runs his current business at a profit with good referrals in an industry with steady demand. Still, no loan. "It's like pulling teeth trying to get money," he said. No re-fi for a subprime The credit crisis started with a surge in delinquencies and foreclosures on loans made to subprime borrowers. The term refers to people with credit scores below 660 on the 300-to-850-point FICO scale popularized by Fair Isaac Corp. Because they couldn't qualify for low fixed-rate loans, such borrowers typically were given adjustable-rate mortgages, or ARMs, with low initial rates. Things worked fine for the first year or two, but since interest rates on these loans began to reset, or adjust upward, a lot of people have been forced into foreclosure because they couldn't handle the higher payments. Slumping real-estate prices and slowing sales activity didn't help, either. Subprime ARMs account for 43 percent of recent residential foreclosures, yet represent just 7 percent of all home loans. Diane Valencia worries she might become part of that trend. The 33-year-old office assistant is a subprime borrower who has owned her Youngtown home since 2004. She has been able to make her payments at the initial 9 percent rate on her ARM, but when that reset recently above 11 percent, things got dicey. She has been turned down several times in her attempts to secure a less-costly, fixed-rate mortgage. Valencia did succeed in getting her lender to modify that reset rate back down to around 9 percent, but the relief will last for only half a year. After that, she worries she'll have to sell the home or lose it. "All I want is a fixed rate," she said. "They can see with my history that all payments are on time, but no one wants to help." Recent Fed interest-rate cuts have eased the ARM-reset problem, said Jay Brinkmann, chief economist for the Mortgage Bankers Association, speaking recently in Phoenix. It also helps that subprime borrowers represent a small slice of the mortgage market and few lenders are offering new subprime loans anymore, he said. Yet Brinkmann worries delinquencies will spread to more prime, or creditworthy, borrowers, especially those with ARMs. Complex and costly Even people who have been able to refinance haven't necessarily had an easy time of it. For Vernon and Judy Schrock of Mesa, the easy part was building their six-unit apartment complex five years ago. They bought a vacant lot near downtown Casa Grande, and Vernon Schrock, a contractor, did most of the work himself on the investment project. "All my life I built homes for other people," said Vernon Schrock, 67. "Here was a chance for me to do it for myself." But they're still having problems with the financing. Things got tough when their variable-rate loan on the property jumped from 6 percent to 13 percent last year, requiring the Schrocks to refinance. But getting out of that original loan, with roughly a $269,000 balance, cost them nearly $15,000 in a prepayment-penalty and related fees. "Every time we asked for a repayment figure, it would go up," said Judy Schrock, a retired court reporter and homemaker. "We felt like they were trying to push us into default." The Schrocks did manage to refinance late last year, which has bought some time. But the new loan also features a variable rate, currently at 8.2 percent, and they're not yet able to pay enough to amortize the principal. "I don't know if this second loan is better or not, because we can't understand it," Judy said. Hesitant lenders Loan denials and refinancings aren't the problem for everyone. Some borrowers complain of slower approvals and other complications. Jim Farmer of Farmer Butler Leavitt, a Phoenix casualty-insurance company, said one of the big national banks operating in Arizona kept him and his wife on hold for more than three months on a construction loan for a major home-remodeling job, even though the loan accounts for a fairly modest percentage of the property's value and even though he has a record of making payments on a business loan. "I got a notice the other day that the loan committee wants to know if I have any more liquid assets," he said. Paul O'Neill, owner of New You Counseling Centers in Mesa, recently had trouble getting one of the large banks in Arizona to reduce the interest rate on his unsecured business line below prime plus 3.75 percent despite steady payments and a high credit score. On a home-equity loan with another lender, O'Neill fully paid off the balance, then received notice that the account had been suspended, which he attributed to the company's own financial problems. Yet a third lender declined a home-equity loan after soliciting him with applications. The reason, he said, was too much self-stated income, which many lenders look at with distrust. "So many times you're rejected because your situation doesn't fit in a computer credit model," he said. When does it end? It's unclear when the credit crunch will ease significantly. The peak in ARM resets is coming over the next few months. That could signal the worst has passed, but it remains to be seen how broadly the credit crunch will spread into commercial loans, auto loans and the like. Firming real-estate prices and an economic uptick would help, as would stabilized stock and bond markets and a rebound in consumer spending. For marginal borrowers forced out of the credit market, now may be a good time to rebuild a credit foundation. Belinda Ziegman of Peoria had been hoping to land a $10,000 or $15,000 loan to start a part-time business as an advocate for patients in deciphering medical bills. The money would have gone for software, advertising and other start-up costs. But after a couple of banks turned down her loan applications, citing poor credit, Ziegman put borrowing and her small-business quest on hold while focusing on making herself more creditworthy. "I'm at a standstill as I try to get credit re-established," she said. "I'm not giving up on my dream, but it's frustrating." <!-- / message --><!-- sig -->
