When it comes to lending the rule of the day seems to be damned if you do, damned if you don’t. President Obama’s command to banks today to “make it so” belies a deep ignorance of the role that lending plays for financial institutions.
Based on fifteen years in lending let me put this succinctly, banks love making loans. Banks do not turn down credit worthy applicants. Think of loans as “widgets”. The company that produces the widgets makes money by selling the widgets for more than the cost of producing the them. Banks make money by selling money (lending) for more than it costs them to purchase the money (deposits). That is a bit simplistic but it gets to the gist of it.
Deposits that are not lent out cost banks money. Every incentive is to get the money out on the street. However, “creditworthiness” is more than just a credit score. Incomes have shrunk but debts haven’t. Even people who have managed to keep up their payments through this recession may not have the room to add another payment. Traditionally people who ran in to a debt to income wall would do a debt consolidation loan using the equity in their homes and generally lowering their monthly payments. For the record, I HATE debt consolidation loans. In my experience, in the long run they hurt more people than they helped. Nonetheless, rare is the person who has equity in their own these days.
Government pressure on financial institutions led to scores of people being put into mortgages that they could not afford. Let’s not repeat the mistake with the small businesses in this country.