Behind The Consumer Credit Collapse

CBS Evening News: Some Risky Mortgage Tactics Mirrored By Typical Lenders

(CBS)  When Pamela Sande bought her new Ford Taurus, she was thrilled.

But like most consumers, she had no reason to care how her bank got the money to give her that loan.

Now, however, it is time to care.

For years, up to 40 percent of all auto loans, all credit card purchases, even student loans, have been bundled by banks and finance companies - the same way they bundled up risky mortgages - and then sold them off as securities.

That's the problem, CBS News correspondent Wyatt Andrews reports.

All the buyers - the global investors and pension funds that got burned by mortgage-backed securities - don't want anything to do right now with securities based on consumer loans.

"Investors are suspicious of securitized products, so they are no longer willing to buy those products," said Vince Reinhart of the American Enterprise Institute.

Since investors stopped buying, the market for consumer credit has collapsed by 80 percent and shocked the American credit system. Six-hundred and thirty-eight billion dollars from investors that was available last year isn't even in the pipeline this year - and isn't being used for new loans.

That leaves the big finance companies like GMAC struggling for cash, with GM now running ads sending customers to banks which might have cash.

"Their business model - make the loan get it out the door to the investor, make new loans - doesn't work anymore," Reinhart said. "And that's what's frozen."

To get the credit markets unfrozen, Treasury Secretary Henry Paulson wants to use the remaining bailout funds - up to $50 billion - to buy or prop up consumer credit. The lack of funds, he argues, is harming growth.

"This is creating a heavy burden on the American people and reducing the number of jobs in our economy," Paulson said on Nov. 13.

So with finance companies withering and investment capital drying up, banks, once again are where the money is, including that $159 billion they got from taxpayers. So are banks making more loans now?

"Well, I'd say that they are," said Diane Casey-Landry of the American Bankers Association.

The banking industry insists it is loaning money, but that the days of easy money, or non-stop credit card offers, are over. Just like car buyer Pamela Sande, a good credit score gets you a loan, a poor credit score gets you a higher interest rate.

"For the consumer it's a much tighter market out there," Casey-Landry said. "The credit standards have tightened and you've seen a retrenchment as the non-bank players have left the marketplace."

And now with even more bankruptcies, unemployment and delinquent loans of all kinds, the declining credit picture for millions of American is an obstacle for Treasury's new strategy. As one economist put it: even if Secretary Paulson can fix the credit markets, he can't fix the credit scores of all those borrowers.

[a_d_s_23]

THIS CREDIT *** IS SOMETHING THAT SHOULD HAVE BEEN CONTROLED BETTER. TO ME THE WHOLE CREDIT SYSTEM IS FLAUD.APPARRENTLY EVERYONE NEEDS A 720 FICO SCORE TO GET ANYTHING DONE. AMERICANS DON''T HAVE THAT TYPE OF SCORE. IF WE KEEP ON THIS ROAD IN A COUPLE OF YEARS NO ONE WILL BE ABLE TO GET ANY CREDIT; THEN WHAT?
EVRYTIME YOU APPLY FOR CREDIT YOUR SCORE GOES DOWN. WHO CAME UP WITH THAT IDEA? THE CREDIT SYSTEM NEEDS AN OVERHAUL. I REMEMBER BACK IN THE 1980''S YOU COULD RENT AN APARTMENT NOW YOU NEED TO HAVE A CREDIT SCORE WORTHY ENOUGHT SO YOU CAN EVEN GET THROUGHT THE DOOR. THATS NOT WRIGHT. I GUESS WILL FIND OUT SOON.

[beach671]

Back in 2002 I was active duty stationed in california and had a green card holder from Mexico working for me. One day he was listening to the local hispanic radio station and broke out laughing and jumped up and down in cheers. The dealerships in california had started giving illegal immigrants new car loans with only a couple utility bills. He was laughing and cheering because he knew the Mexicans would make the down payments then drive all those new vehicles south of the border...never to be seen again.

Detroit had to show big growth...they didn''t care how. Now we will suffer for poor financial decisions.

[freefla]

Menmotoscutr: asks "Where is the money? Find it. Tax it"
Unfortunately you cannot tax money that is not earning anything. People with the money did the same thing in the 70s and that was because banks were paying 12% on CDs. The savers were rewarded. It is happening now with CD rates climbing to 4-5%. When money sits and is not invested, the economy does not grow. Unfortunately, Obama''s tax plan does not reward successful investors- it punishes them by "spreading their wealth". Wrong ideas, wrong time. too bad.

[freefla]

I AGREE some of the credit crisis was manufactured. AIG did not lose 300 billion dollars in one day or one week. We were made to panic so that 1. we would elect Obama 2. We would provide no strings money to overpaid executives in the banking and securities sector. Unfortunalely, it backfired, snowballed, and now it is out of control. None of this freefall was natural in the beginning. Now those with money are sitting on it in safe banks and waiting.....How long will it last. Try four years.

[Marie Zarankevich]

What a load of bat guano! -- All this financial crisis junk is just that. -- JUNK! -- All of America is still doing what it does best. -- We KEEP ON TRUCKIN''. -- All these convenient emergencies are being manufactured just to make us fearful and easier to manipulate. -- None of it is real. -- It''s a generated illusion, devised to manage populations, and manipulate popular opinion. -- KEEP YOUR HEAD!

[Marie Zarankevich]

What a load of bat guano! -- All this financial crisis junk is just that. -- JUNK! -- All of America is still doing what it does best. -- We KEEP ON TRUCKIN''. -- All these convenient emergencies are being manufactured just to make us fearful and easier to manipulate. -- None of it is real. -- It''s a generated illusion, devised to manage populations, and manipulate popular opinion. -- KEEP YOUR HEAD!

[jizzumjim]

it''s all the democrats fault. no its all the republicans fault. thanks for the great debate you idiots.

[credibility2]

Greedy consumers who had to have everything they weren''t entitled to having went into debt without any responsibility or personal accountability in fulfilling their contract with the credit card companies to pay the debt. Living beyond one''s means is an example of irresponsible, selfish and immature people. Can''t pay for it, then don''t get it! Do without, live within your means, and try saving for it. Can''t save, then you don''t need it. Get the picture slackards? I pay my debts off and on time. I don''t expect someone else to cover for me and bail me out. I''m sick and tired of low-life''s getting off. What credit card and mortgage defaulters are doing is tantamount to fraud and a crime.

[mytoosense]

I find it ironic that my credit score is great because I don''t borrow money.

I manage to do this by not buying new.
I buy most major items, like cars, boats, motor cycles, campers, yard equipment, used at a huge discount. Even my house is 90 years old.

I have not had any credit card dept in 20 years.
I do my banking at a credit union.

I am one of many Americans who are thorns in the side of our credit driven, consumer based, capitalistic system; I am a conservative spender.

And I''m one who can still get a loan, but I won''t.

[Razzl]

Given that much of this crisis was caused by sloppy practices by banks and bundlers, such as the WaMu''s of the world buying loans from mortgage brokers without checking the loan information for honesty/accuracy, it seems like part of the way out is for banks to package loans using very strict standards (such as high minimum down payments to people of certain minimum credit ratings with verified incomes) and then advertise themselves in the market to investors as sellers of "quality" investment loans. Once investors see the verifiable quality on the marketplace the market for all loans will open up again, with transparency and fiduciary responsibility painted back into the picture. Investors in the market are looking for quality packaged product, so the banks need to slow down and do their due diligence to provide it to them, including taking responsibility for what mortgage brokers bring to them...

[perk235]

things are cheaper to buy due to being made elsewhere yet people go into debt buying them......they must be brilliant
Posted by jamesm12341 at 09:22 AM : Nov 19, 2008
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I agree, it is brilliant.

With no manufacturing jobs to support consumption, the only way to keep our GDP alive is debt. We have unprecedented debt in the corporate, national and private lives in our country.

It is a culture of debt that goes beyond an individual''s credit card.

[perk235]

how did the GOP make people buy stuff they couldnt afford?
Posted by jamesm12341 at 08:58 AM : Nov 19, 2008
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The wealthy elite, both GOP and DEM, supported tax systems and laws that reward companies for outsourcing manufacturing. Whole cities in other countries have been built on the wealth from job creation there.

In contrast, our own country has shrunk due to wealth transfer to other countries. That is, except for the wealth elite, who can live anywhere in the world.

Our standard of living has a ways to go down and others a ways to go up before we reach equilibrium.

[perk235]

How can an economy with GDP that relies on consuming be expected to survive?
Posted by perk235
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How can an economy with GDP that relies on NOT consuming be expected to survive?
Posted by menmotoscutr at 08:37 AM : Nov 19, 2008
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The first comment was posted in the context of how we don''t make most of the goods (interesting word, that, I never noticed it''s double meaning before) that we buy.

That means our economy depends on consuming, but without jobs from manufacturing. That isn''t sustainable.

The way it has worked so far is to send jobs overseas, their economy grows, they buy US Treasuries, we use that money to consume and go into debt, and now we have a meltdown and a sky-high deficit and debt.

[razrback44]

menmoto.

You stated the problem well. "Tax it." Folks are taking out huge sums of money and finding safe havens and/or tax-exempt securities. There is not a warm, fuzzy feeling about where we are headed with this govt.

I do think folks are jumping the gun, however. Today, there is only a 15% tax on cap gains, etc. That will be there for a while. When it looks like the tax may rise to 28%, then get out. But, withdrawing 100% now looks a little foolish to me. Just stay alert. Hopefully, most folks will not panic and will remain in the market..at least a while longer.

[gop_will_win]

Investors dont want to buy consumer credit because they know liberals will spend their money on crack and meth and forget to pay their bills.

"Six-hundred and thirty-eight billion dollars from investors that was available last year isn''t even in the pipeline this year."
--
Where is it? It was there last year. Where did it go? Who has it? Nothing just vanishes. Someone has it and they put it somewhere. Find it. Tax it.

How can an economy with GDP that relies on consuming be expected to survive?
---
How can an economy with GDP that relies on NOT consuming be expected to survive?

Obama picks Eric Holder as Attorney General. Eric Holder supports very strict gun control. HIDE YOUR GUNS...Posted by mr22587
---
Maybe if we buy them on layaway we won''t have to HIDE them. We''ll just let the seller HOLDER them til we need them.

[insight2008]

Big cars. Big homes. Easy credit. No savings, NONE. Happy that our homes were appreciating 8%/yr and portfolios 20%. We really thought this could last forever. The commerical "I want it all and I want it now" speaks volumes. Instant gratification. No personal responsibility. It is always someone''s fault but not mine. I "need" it. Paying $200 for tennis shoes that costs less than $1 to make.

One generation ago the credit card debt/family was $600. Today, $7300. Not for essentials. For "stuff."

My friend bought an Escalade, which then put him within missing 1 paycheck of not being able to meet his obligations. Nothing wrong with his 5 yr old suv. Now, he is ticked because he has been laid off and is in serious financial trouble.

Trickle down, trickle up, trickle sideways has nothing to do with anything. My Dad had a 7th grade education, but he dammn well knew what was in his wallet and he had no problem with saying "no, I can''t afford it and I ain''t charging it either."

Paying for "stuff" thru credit. We are now paying dearly.

[jackp32]

There is $3 trillion in consumer credit card debt just waiting to explode. This is going to be the next big crises but this one will bring down the US financial system. Who is at fault? The stupid consumers who buy things on credit to impress their neighbors and friends and don''t think about how to pay the bill. They are going to pay a heavy price when the system collapses in the near future. Stupidity will soon be rewarded.