Americans are Borrowing Again but Still Less than before Freeze

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The Wall Street Journal
By: Neil Shah
May 7, 2013

BOISE, Idaho--When the economy nose-dived several years ago, Lou Aaron found it impossible to get a bank loan, forcing him to use six different credit cards to keep his 1950s-style drive-in restaurant running.

Now, the 50-year-old chef said banks are coming to him offering loans. His sales are climbing, and he expects to borrow $350,000 to open a third location next year where he will sell prime rib, hamburgers and his "Idaho Ice Cream Potato" dessert.

America's credit crunch is easing. For the past six years, consumers and businesses have struggled to borrow money, but slowly, things are getting easier.

Large U.S. companies are taking advantage of low interest rates to borrow record amounts of capital in bond markets. Banks are opening the spigots for commercial and industrial firms, and loans grew at an 11% annualized rate in the first quarter of this year, the sixth double-digit percentage increase in seven quarters, Federal Reserve data show. According to the Fed's survey of senior bank-lending officers released Monday, 28% of banks lowered the cost of credit lines early this year to smaller firms like Mr. Aaron's that have annual sales of less than $50 million. Residential lending began edging up last year, and even people with bad credit can get a loan to buy a car these days.

In all, some $713 billion in credit flowed to U.S. households and nonfinancial businesses last year, double 2011's $336 billion, according to the Fed. That is still a fraction of the $2.2 trillion in credit that lifted American consumers and businesses in 2007.

Indeed, many Americans still struggle to get loans. Banks have tightened standards, especially for young people and those with past financial problems.

The improved access to credit in recent months suggests America's economic outlook is gradually brightening, despite recent hurdles like federal budget cutbacks, increased payroll taxes and troubled overseas markets. Falling unemployment--the U.S. jobless rate slid to 7.5% last month--and rising stock and home prices should fuel spending, the biggest driver of the economy. More credit should speed this process.

"The underlying conditions that support growth have been gradually improving," William Dudley, Federal Reserve Bank of New York president, said in a speech last month. He said improved "household access to credit" was a factor.

The change is evident in Boise, a community that suffered a real-estate crash and recession similar to the nation's.

The metro area's 640,000 residents are recovering from their debt hangover.

Per capita debt among Boise consumers has dropped nearly 19% from its peak in 2008 to about $35,000 as of the first quarter of 2013, mostly due to foreclosures and bankruptcies, according to data from Moody's Analytics and Equifax Inc., a credit monitoring service. Debt levels rose in the first quarter for the first time in five years, suggesting that Boise residents are starting to borrow again.

Over the past year, Boise's economy has picked up. In this year's first quarter, for example, the number of city permits issued for new residential and commercial construction projects--efforts that usually require borrowed money--jumped nearly 20% to a five-year high. Meanwhile, Boise's unemployment rate fell to 6.1% in March from 7.6% a year earlier.

"There's an abundant amount of credit available," says John V. Evans III, executive vice president of D.L. Evans Bank, a local lender. Mr. Evans says his bank is "aggressively trying to make loans." Its commercial loans are up 15% so far this year and 20% from 2008 levels, while mortgage loans are up 52% and 170%, respectively.

Al Youngwerth, president of Rekluse, a 10-year-old manufacturer on the outskirts of Boise, recently secured $700,000 in credit to buy equipment and invest in his factory.

His firm, which makes about 750 different parts for off-road motorcycles and employs 40 people, posted a 25% jump in sales last year and its credit history is clean, Mr. Youngwerth says. When the 48-year-old approached his bank, KeyBank, for loans to finance the purchase of a new robot and other equipment, the bank initially fretted about the company's high level of debt relative to its assets, he says.

Eventually, Mr. Youngwerth won over his bankers, and the robot--which helps with loading--arrived about a month ago. "The credit came quickly and easily," he said.

John Williamson, senior vice president at KeyBank, said "banks, contrary to popular belief, do want to lend money." However, he said, KeyBank and other lenders need "to be protective of our capital." Lending by KeyCorp, the parent of KeyBank, grew 6.5%, on average, in the first quarter of this year from a year earlier, the bank said.

Credit usually gets tighter during downturns, but the latest recession was significantly worse, thanks to billions of dollars of souring home loans that shook the nation's banks and gummed up its mortgage-finance system.

Many banks remain reluctant to make home loans to borrowers with tarnished credit histories. Lenders worry loans they unload to Fannie Mae and Freddie Mac, the government-owned mortgage-finance giants, could be returned to them. And Wall Street's mortgage-securitization machine is struggling to rev up amid stricter rules and unfinished regulations.

"The most frozen assets take the longest to unthaw," said Deutsche Bank economist Torsten Slok. "And at the end of the line of dominoes is mortgages."

Credit conditions have eased more quickly for bigger businesses. Micron Technology Inc., one of Boise's top employers, is borrowing more cheaply, despite its low credit rating and frequent dry spells in one of its businesses, making memory chips for personal computers.

Chip prices, along with Micron's profits, tend to swing depending on supply and demand. The firm has a "double-B-minus" credit rating from Standard & Poor's Ratings Services. A Micron spokesman didn't have a comment on the rating.

Investors are scrambling to buy the company's bonds, says Kipp Bedard, Micron's vice president of investor relations. In February, Micron borrowed $600 million from investors by issuing "convertible" bonds--investments that turn into stock under certain circumstances. Micron is paying investors annual interest rates of 1.625% and 2.125% for the two varieties of the convertibles. A year earlier, the company borrowed using similar instruments and paid 2.375% and 3.125%.

Firms like Micron have the Fed to thank for unusually low borrowing rates. By holding its key short-term interest rate near zero and driving down long-term rates through its bond-buying programs, the Fed is pushing investors hungry for returns out of low-yielding bets like government bonds into riskier assets like corporate bonds and stocks.

Consumer credit, which has been slower to respond to the Fed's efforts, is showing signs of life too.

Even borrowers with patchy credit can now qualify for "subprime" car loans, which were 43% of auto loans made in the fourth quarter of 2012, according to Experian, a credit-reporting firm.

Home-equity loans, which allow homeowners to tap their homes for cash, are creeping back. It is the same story with jumbo mortgages, usually taken out by affluent people. The bottom line is that banks are dipping their toes back into riskier territory.

There also are signs traditional mortgage lending is picking up: Residential home loans from banks expanded at an annualized rate of 1.4% in the first quarter, after contracting in the final months of last year, Fed data show. The Fed's latest survey of bank lending officers showed nearly 10% of banks polled said they were easing standards on "prime," or low-risk, mortgages, compared with less than 5% in a previous survey.

The recovery of the housing market, which appears to have turned a corner this year, could provide an additional boost. With rising home values making Americans wealthier and improving banks' own balance sheets, more lenders may become comfortable lending. "Rising house prices are likely to encourage a further loosening of credit," the New York Fed's Mr. Dudley recently said.

Meanwhile, many Americans are taking advantage of low mortgage rates to refinance their home loans.

Carrie Applegate finished refinancing the mortgage on her two-bedroom Boise home in January.

It wasn't easy. Ms. Applegate has lived in her home eight years, held the same administrative job at Boise State University for 10 years and has a solid credit score around 750. But when she had her house appraised last fall, its market value was only $130,000--which meant she had 19% equity in her home, not the 20% required by her bank to refinance. She scrapped that effort and retried under the government's Home Affordable Refinance Program, which makes it easier for borrowers to refinance.

Eventually the refinance came through--allowing Ms. Applegate to shave about $100 off her monthly mortgage payment of $730. "I'm happy I did it, I'm better off financially," she said. The refinancing process "is starting to get better."

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