Home / Markets / Economy
Tuesday, October 07, 2008
Consumer Borrowing Falls 3.7% in August
Associated Press
Consumer borrowing fell in August for the first time in more than a decade as households, battered by rising job layoffs and the decaying economy, cut back sharply on their use of credit.
The Federal Reserve said Tuesday that consumer borrowing fell at an annual rate of 3.7% in August, before the financial crisis became acute in September, forcing the government to approve a $700 billion rescue of the financial industry.
August's decline in consumer credit marked the first time that total borrowing had fallen since a 4.3% rate of decline in January 1998.
The weakness reflected a big decline of 5.4% at an annual rate in the category that includes auto loans and a 0.8% rate of decline in the category that includes credit cards.
The 3.7% rate of decline for overall borrowing followed a 2.4% rate of increase in borrowing in July.
Consumer borrowing, which the Fed defines as all loans not secured by real estate, totaled $2.58 trillion at an annual rate in August, down by $7.88 billion from the July level. That was a much weaker performance than the $5.25 billion increase in borrowing that economists had been expecting.
Economists are worried that consumer spending, which accounts for two-thirds of total economic activity, will decline in the July-September quarter. That has not happened since 1991 and could set the stage for the economy to slip into a recession.
The economy is being battered at the moment by rising job layoffs, a prolonged housing slump and the most severe credit squeeze in decades as banks cut back on their lending in the face of record defaults for home mortgages.
The 5.4% drop at an annual rate in the category that includes auto loans, reflected the struggles automakers are having this year as the weak economy and soaring gas prices have cut into sales.
The 0.8% rate of decline in borrowing in the category that covers credit cards followed a 5% jump in this category in July.
FOX Translator
No data currently available.
No data currently available.
If you¿re like the vast majority of the population, buying a home is the largest personal investment you will ever make. You're buying something that¿s many times your yearly salary with the intention of holding onto that home for many years.
The bank you're going to get the money from to buy that home knows that, too. And if you're going to get a mortgage on a home, the bank wants to know how you're going to pay for said house.
Usually, you give a lot of paperwork to the bank, so the bank can tell if you're able to afford the house or not. You give them bank statements, credit card statements, letters from your employer stating your salary, tax returns, etc.
But, what happens if you may not be the perfect candidate for the home of your dreams? Or, you're buying too much home (the bank thinks you can afford a $200,000 home, you want a $230,000 home). Or, you don't have the money for a down payment. Or, you haven't paid your bills on time in the past. Or, the documents of how you make your salary are not 100% available.
Enter the subprime mortgage. Subprime mortgages are loans given by banks to people who may fall under any one of those above conditions, or others. Why would anyone want a subprime mortgage? Well, homebuyers get subprime mortgages because they get to buy the home they want. Banks give subprime mortgages because they can charge people more money for that mortgage. Remember, the difference in interest rates on a $200,000 or $300,000 home can mean the difference between hundreds of dollars in interest payments.
Still there¿s risk for both the person getting the mortgage and the bank granting it. When the playbook works, the value of the house rises. So, even if Joe Q. Badcredit couldn't afford the house he bought in 2001, at last resort Joe or the bank could sell the home, make a bundle off its increased value, and the bank could get its money back.
The playbook goes out the window, though, when home prices don't increase. Then homeowners run the risk of defaulting and banks lose money. At its worst, homeowners can lose their houses.
If you¿re in the market for a home, and the banker says you qualify for a subprime mortgage, it probably means you need to provide more documentation of how you¿re going to pay for that house. Or, you may be buying too much home. Talk with your banker about why you qualify for a subprime mortgage, and try to fix it.
