These days, many consumers are finding themselves on more solid financial ground than they’ve been on in years, and as a result, many may want to begin borrowing again. However, it’s not that simple, particularly if they’ve defaulted on loans in the past.
Lending restrictions have remained rather tight since the end of the recession, even as other economic indicators have shown that consumers are feeling better about their finances and more likely to begin borrowing, according to a new study from the Federal Reserve Bank of San Francisco. Since 2008, consumers have shed about 7 percent of all their outstanding balances, accounting for about $1 trillion worth of declines. But much of that came as a result of mortgage defaults, which were numerous in the wake of the housing market’s collapse; home loan balances alone make up as much as 70 percent of national debt.
However, based on data from the top and bottom housing markets in terms of home price increases prior to the housing bubble bursting, it seems that borrowers in these areas with different credit scores have had very different access to credit since the recession ended, the report said. Those who defaulted on their mortgages during the market’s collapse, often through little fault of their own, have had significant difficulties in obtaining new financing since the economy began to recover, especially when compared to borrowers who were able to stay current on their loans the entire time.
That may not necessarily be fair to those borrowers, who due to restricted credit access to credit, may still be considered subprime, the report said.
“Defining subprime as borrowers with credit scores below 650 is arbitrary,” wrote John Krainer, a senior economist at the San Francisco Fed, and the study’s author. “With a lower cutoff for subprime, the decline in debt would be more dramatic. The relatively mild decline in prime nonmortgage debt is due mainly to renewed demand from this group of borrowers, who were apparently willing and able to take advantage of low interest rates.”
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Experts have noted that tight mortgage restrictions may also be holding back a fuller recovery in the housing market, as many borrowers who may now have the financial wherewithal to deal with these debts may still have limited or no access to favorable terms.
Image: Patrick Feller, via Flickr