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."
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