FINANCE: Bailout billions not making loans easier to find

Higher-risk businesses and borrowers struggle to secure financing.

By ZACH FOX - Staff Writer | Friday, November 28, 2008 2:10 PM PST ∞

The U.S. government has pumped billions of dollars into the nation's banking system, yet borrowing money remains an obstacle for some consumers, mortgage brokers said last week.

The two behemoths that oversee the nation's finances, the Federal Reserve and the U.S. Treasury, have taken extraordinary measures over the last few months ---- from lending more to backstopping losses to direct infusions of capital.

But for some San Diego County borrowers, the moves have not made it easier to get money from those banks.

A collapse of some of the largest Wall Street players has elevated one lending qualification above all others: risk.

Therefore, while local home buyers with a large down payment, solid credit scores and a paycheck have no trouble finding a loan, borrowers with plenty of cash but who are self-employed and do not show regular income can struggle to find a home loan.

And some businesses, especially those related to the much-maligned housing sector, have seen lines of credit evaporate.

"There's this huge pricing on risk at this moment," said James Hamilton, an economics professor at UC San Diego. "That's a big problem, and it's not so clear that that can be fixed."

Though banks have received billions of dollars from the government under the rationale that it would be pumped into the economy in the form of loans, lenders have opted instead to hoard the cash.

One major problem is a contradiction from government officials, said Tony Cherin, a finance professor at San Diego State University.

Entities such as the Federal Reserve have done what they can to get banks lending again. But the regulators who make sure banks are sound have encouraged the institutions to clean up their balance sheets, which requires cash reserves on hand.

"You're between a rock and a hard place right now if you're running a bank," Cherin said. "The government wants you to loosen up credit. At the same time, the regulators are hammering because your return (profit) is not high enough."

One business hurting for a loan is Barratt American, a large private home builder based in Carlsbad, said Michael Pattinson, president of the company.

Its line of credit evaporated more than a year ago amid the housing downturn. Though the company has secured new sources of funding, without a line of credit the company has been forced to lay off about 90 percent of its work force, Pattinson said.

For prospective home owners, well-qualified borrowers should not struggle to find financing, brokers said. But self-employed buyers whose income does not show up in full on tax returns because of write-offs might find a home loan difficult to find. Often, such borrowers use "stated-income" loans, where they pay a higher interest rate without having to fully prove income.

"We've injected how many billions into the economy, and it's only getting worse," said Dave Hopkins, a mortgage broker with Rancho Financial in Rancho Bernardo.

Though stated-income loans caused much of the foreclosure crisis, the products serve a legitimate purpose for business owners, he said.

"We definitely need to clean up the guidelines, but they're taking a shotgun approach," Hopkins said.

At the same time, borrowers who can provide complete documentation of income are able to pay less for a mortgage following the bailouts, with interest rates dipping below 6 percent last week.

Because of the difficulty in lowering the cost of higher-risk financing, Hamilton, the UCSD professor, said the government should redirect its efforts to fighting deflation.

Deflation jumped up the list of economic problems about a month ago, when core prices on consumer products turned negative. The phenomenon makes it much more expensive to secure loans because money borrowed is worth less than the money repaid.

Also, if money is worth more tomorrow than today, banks have an incentive beyond strengthening their balance sheets to hoard cash.

"We do want to worry about deflation, and the Fed ought to prevent it," Hamilton said. "That's a more modest goal than these other things that aren't working."

Contact staff writer Zach Fox at (760) 740-5412 or zfox@nctimes.com. Read his blog, "On the Realside," at bizblogs.nctimes.com.