Monday, August 13, 2007

Credit Market Fall-Out #21 - What a Credit Crunch Could Mean for the US

An interesting summary of what a credit crunch would do the to the US. Of special interest is the effect on the job market. From Market Watch:

There's no denying that the financial markets are on edge and volatile, and some companies are in difficult straits, triggered in large part by rising foreclosures in the subprime market and the effect on investments tied to those mortgage loans.

But the degree to which the current situation affects individual Americans depends a lot on what you've got planned in coming months.

Mortgage Market

If you'd like to tap into the mortgage market -- buy a house, refinance your mortgage, take a home equity line of credit -- the recent turmoil will directly affect what kind of loan you can get and how much it will cost.

For many borrowers now, "it's more difficult to get a mortgage loan," said Mark Zandi, chief economist with Moody's "You have to have a better credit score, you have to have more equity," he said.

Job Market

Thanks in part to the subprime mess, companies are finding it harder to get financing for some deals. Right now, companies are mainly unable to finance their riskiest deals, but if the credit crunch should spread and hit most companies, average Americans may feel the pinch -- in the job market.

"Businesses that can't get credit or have to pay more for capital will be less aggressive in their investment and hiring," Zandi said. "The job market is weakening and I think will weaken further as a result of recent events."

The Economy

For his part, Zandi notes the economy is still in growth mode, but the rate of growth is slowing. In a note on Thursday, Zandi wrote that "the odds of a recession over the next six to 12 months have risen from one-in-six to one-in-four."

"I do think most everyone will be touched in some way by the meltdown" in various parts of the mortgage market, Zandi said in a telephone interview.

Homeowners who aren't in the market for a loan may still find their home value decreasing as the tightening of credit constricts home sales, and that plus a volatile stock market "could affect a household's wealth and their perception of their wealth and how aggressively they spend."

Other Credit

The credit squeeze has not spread to other forms of consumer credit. With credit cards, car loans and other consumer credit, McBride said there's been no noticeable change in access to credit or rates.

"You're not likely to see much movement in those rates or restriction to capital without some deterioration in credit quality" -- and that's not happening at this point, he said.
But others see problems ahead, particularly for borrowers who have less-than-perfect credit ratings. "Even in those [credit card and auto-loan] markets you have the process of securitization of these loans," Roubini said.

"You're going to have a credit crunch across any securitization market. That's going to tighten credit conditions for consumers across the board."

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