Update on the credit crunch

Posted by Patrick Gannon :: August 24, 2007 @ 7:39 am

These are tough times in the financial markets. As we discussed last Saturday in our post on subprime, borrowers are beginning to feel the pinch of higher interest rates and much tougher underwriting criteria. Even for borrowers with prime credit (FICO score above 620), it is difficult to qualify for a loan now. Those that do qualify face tougher terms, limits, and more.

The credit crunch looks like it is here to stay for a while. The markets will continue to react to ongoing disclosure of subprime exposure. The Fed is doing a good job of trying to inject confidence into the markets by lowering the discount rate, and we think that they are likely to lower the fed funds rate at their September meeting. According to a poll conducted by Reuters, 71.4% of economists think the Fed will cut the fed funds rate at or before its September 18 meeting.

Until then, companies are having a hard time issuing commercial paper – the buyers have all pulled out of the market. This is leaving a number of deals at risk. For example, one of the big private equity deals this year was the sale of Home Depot Supply is supposedly facing pressure because the banks are having a hard time lining up the financing for it. There is even speculation that private equity debt issuance will stay dried up for months – because commercial debt is so hard to place. Mortgage companies and mortgage units of financial services companies have responded to the crisis by cutting costs. Lehman Brothers, Accredited Home Lenders Holding, and HSBC Holdings announced thousands of job cuts this week.

What should consumers do? If you do not need to borrow or refinance, you should be fine from a credit perspective. You may want to talk with your financial advisor about your overall portfolio during the time of turmoil.

If you need to borrow, shop around for great rates. If you need to borrow 25,000 or less, and you have good credit (640+ FICO, 20% or lower DTI), consider getting a loan with Lending Club.

If you are looking for somewhere to put your money to work, consider lending it at Lending Club, where you can put it into a diversified portfolio of loans that can earn from 7% to 17% before losses.

Please send us your comments.