Bankruptcy & Foreclosures

Each day I like to check all of the usual financial news sources: CNN, local news, Yahoo Finance, the Associated Press, Bloomberg, etc. and if I were to summarize the theme of all of their reports of late you would likely say something like “duh!” I will risk being labeled Captain Obvious and proceed to share some of the latest.

Further evidence that the U.S. economy is slipping into the gutter of recession comes from a rise in jobless claims. According to The Conference Board (a business-backed research group) its index of leading economic indicators fell in February for the fifth consecutive month. And why not? The US Economy has been experiencing what some view as a sandwiching effect by rising fuel costs, falling home prices and tightening credit markets. Does it really come as a surprise to hear that consumers and businesses have reduced spending as a result?

Here’s the catch, reduced spending is troublesome in and of itself but the problem is further compounded on the lending side of the equation. These economic turbulence equal times when consumers simply need banks to lend more freely. American consumers often recover from personal economic slowdown by borrowing. Today’s version of “saving for a rainy day” has become “borrow until a sunny day”. Sadly the lending industry is making it harder to borrow even for individuals with good credit.

Banks that have lost billions because of what boils down to essentially bad bets during the housing boom are now reverting to lending standards as strict as they’ve been in nearly 20 years. A popular rumor is that this proverbial tightening of the belt affects only homebuyers in need of a mortgage. Unfortunately the reality is that current homeowners seeking refinance or home equity lines of credit are going to experience additional hurtles to clear as well. The situation can result in higher down payments and higher bars for credit scores not to mention acceptable proof of income and employment, something they often did not require during the housing boom (a process commonly called stated income).

Naturally the toughest restrictions will be found in markets where home prices are falling although sadly regions where property values are rising are still not immune.

Here’s a statistic to consider: Mortgage insurers have flagged over 9,600 ZIP codes in at least 34 states where they won’t insure certain types of home loans due to value risks.

Unlike many of the popular financial news sites, I will refrain from offering solutions to the sandwich effect until there’s signs of early economic stabilization on at least one of the sides.