With heavy debt loads and high
joblessness, Americans are cautious. A) The US Federal Reserve
(Fed)'s announcement last week that it intended to keep credit cheap for at
least two more years was a clear invitation to Americans: Go out and
borrow. B) But many economists say it will take more than low
interest rates to persuade consumers to take on more debt. There are already
signs that the recent stock market fluctuations, turbulence in Europe and the US
deficit have scared consumers. On Friday, preliminary data showed that the
Thomson Reuters/University of Michigan consumer sentiment index had fallen this
month to lower than it was in November 2008, when the United States was deep in
recession. Under normal circumstances, the Fed's announcement might have
attracted new home and car buyers and prompted credit card holders to rack up
fresh charges. But with unemployment high and those with jobs worried about
keeping them, consumers are more concerned about paying off the loans they
already have than adding more debt. And by showing its hand for the next two
years, the Fed may have thoughtlessly invited prospective borrowers to put off
large purchases. C) Lenders, meanwhile, are still dealing with
the effects of the boom-gone-bust and are forcing prospective borrowers to go to
extraordinary lengths to prove their creditworthiness. D) "I
don't think lenders are going to be interested in extending a lot of debt in
this environment," said Mark Zandi, chief economist of Moody's Analytics, a
macroeconomic consulting firm. "Nor do I think households are going to be
interested in taking on a lot of debt." In housing, consumers have already shown
a slow response to low rates. Applications for new mortgages have decreased this
year to a 10-year low, according to the Mortgage Bankers Association. Sales of
furniture and furnishings remain 22% below their pre-recession peak, according
to SpendingPulse, a research report by Master Card Advisors. Credit card rates
have actually gone up slightly in the past year. The one bright spot in lending
is the number of auto loans, which is up from last year. But some economists say
that confidence among car buyers is hitting new lows. E) For
Xavier Walter, a former mortgage banker who with his wife, Danielle, accumulated
$20,000 in credit card debt, low rates will not change his spending habits. As
the housing market topped out five years ago, he lost his six-figure income. He
and his wife were able to modify the mortgage on their four-bedroom house in
Medford, New Jersey, as well as negotiate lower credit card payments. Two years
ago, Mr. Walter, a 34-year-old father of three, started an energy business. He
has sworn off credit. "I'm not going to go back in debt ever again," he said.
"If I can't pay for it in cash, I don't want it." F) Until now,
one of the biggest restraints on consumer spending has been a debt aftereffect.
Since August 2008, when household debt peaked at $12.41 trillion, it has
declined by about $1.2 trillion, according to an analysis by Moody's Analytics
of data from the Federal Reserve and Equifax, the credit agency. A large portion
of that, though, was simply written off by lenders as borrowers defaulted on
loans. By other measures, households have improved their position. The
proportion of after-tax income that households spend to remain current on loan
payments has fallen. G) Still, household debt remains high.
That presents a paradox: many economists argue that the economy cannot achieve
true health until debt levels decline. But credit, made attractive by low rates,
is a time-tested way to increase consumer spending. With new risks of another
downturn, economists worry that it will take years for debt to return to
manageable levels. If the economy contracts again, said George Magnus, senior
adviser at UBS, then "you could find a lot of households in a debt trap which
they probably can never get out of" H) Mortgage lenders,
meanwhile, burned by the housing crash, are extra careful about approving new
loans. In June, for instance, Fannie Mac, the largest mortgage buyer in the
United States, said that borrowers whose existing debt exceeded 45 to 50% of
their income would be required to have stronger "compensating" factors, which
might include higher savings. Even those borrowers in strong financial positions
are asked to provide unusual amounts of paperwork. Bobby and Katie Smith have an
extremely good credit record, tiny student debt and a combined six-figure
income. For part of their down payment, they planned to use about $5,000 they
had received as wedding gifts in February. But the lender would not accept that
money unless the Smiths provided a certified letter from each of 14 guests,
stating that the money was a gift, rather than a loan. "We laughed for a good 15
or 20 minutes," recalled Mr. Smith, 34. Mr. Smith, a program director for a
radio station in Orlando, Florida, said they ended up using other savings for
their down payment to buy a $300,000 four-bedroom house in April.
I) For those not as creditworthy as the Smiths, low rates are irrelevant
because they no longer qualify for mortgages. That leaves the eligible pool of
loan applicants wealthier, "older and whiter," said Guy Cecala, publisher of
Inside Mortgage Finance. "It's creating much more of a divide," he
said, "between the haves and the have-nots." "Car shoppers with the highest
credit ratings can also get loans more easily, and at lower rates," said Paul C.
Taylor, chief economist of the National Automobile Dealers
Association. J) During the recession, inability to obtain
credit severely cut auto buying as lenders rejected even those with good credit
ratings. Now automakers are increasing their subprime (次级债的) lending
again as well, but remain hesitant to approve large numbers of risky
customers. K) The number of new auto loans was up by 16% in the
second quarter compared with the previous year, said Melinda Zabritski, director
of automotive credit at Experian, the information services company. But some
economists warn that consumer confidence is falling. According to CNW Marketing
Research, confidence among those who intend to buy a car this year is at its
lowest since it began collecting data on this measure in 2000.
L) On credit cards, rates have actually inched higher this year, largely because
of new rules that curb the issuer's ability to charge fees or raise certain
interest rates at will. M) At the end of the second quarter,
rates averaged 14.01% on new card offers, up from 13.75% a year earlier,
according to Mail Monitor, which tracks credit cards for Synovate, a market
research firm. According to data from the Federal Reserve, total outstanding
debt on revolving credit cards was down by 4.6% during the first half of tile
year compared with the same period a year earlier. N) Even if
the Fed's announcement helps keep rates steady, or pushes them down, businesses
do not expect customers to suddenly charge up a storm. O) "It's
not like, 'Oh, credit is so cheap, let's go back to the heydays
(鼎盛时期),'" said Elizabeth Crowell, who owns Sterling Place, two high-end home
furnishing and gift stores in New York. "People still fear for their jobs. So I
think where maybe after other recessions they might return to previous spending
habits, the pendulum hasn't swung back the same way."
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The lenders in the current credit market are becoming more cautious.
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According to Guy Cecala, the banks' policy on mortgage lending will result in a wider gap between the rich and the poor.
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The purpose of the announcement issued by the US Federal Reserve last week is to encourage consumers to get more bank loans.
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The author cites Xavier Waiter's case to show that people now won't buy things unless they have the money.
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The reason for people's reluctance to take on more debt despite the low interest rates is that they are pessimistic about employment prospects.
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The economists' concern regarding the current economy is the unmanageable debt levels.
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Credit card interest rates have gradually increased recently because new rules do not allow the issuers to raise certain interest rates or charge fees.
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During the recession, the number of car buyers decreased because it was difficult to obtain credit.
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According to Elizabeth Crowell, the current recession, unlike previous ones, has not seen a swing back in people's spending habits.
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We can learn from the Smiths' story that mortgage lenders are now careful about borrowers' qualifications.