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Chattanooga: Credit grip tightens at home

By: Dave Flessner
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Charles Hixon

The television ads pitching no-money-down sales on anything from couches to cars to condominiums now may be as ancient as $2-a-gallon gas.

The era of easy credit appears to be over even after Congress approved a $700 billion rescue plan last week to help ease a growing global credit crisis, according to lending experts.

“Coming out of this crisis, credit is going to be much harder to get and more expensive when you get it,” said Charles Hixon, director of the Consumer Credit Counseling Service of the Partnership for Families, Children and Adults in Chattanooga. “I think it is probably a good thing because for so long it’s been so easy to get credit that obviously people have been rewarding themselves with things that they don’t need and expenses that they can’t afford simply because it was easy to get.”

Chattanooga lenders insist they still have plenty of money to lend and are eager to make loans. But to get approved for most loans, borrowers will have to put down more of their own money and have better credit records than they did over the past three or four years.

“The old becomes new again,” said Mike Butler, city president of SunTrust Bank in Chattanooga. “A lot of mortgage lending had gotten a little loose and lax, so it’s certainly different now than it was two or three years ago. But it’s not different than it was five or six years ago.”

For many consumers, returning to stricter credit requirements of the past means they will get fewer and smaller loans. For lenders, that should mean less chance of a repeat of the hefty financial losses that helped create the current credit crisis.

But because consumer spending accounts for two-thirds of U.S. economic activity, tighter credit means a slowdown in the economy.

U.S. Sen. Bob Corker, R-Tenn., the former Chattanooga mayor and developer who worked on putting a revised bailout plan together in Congress, told Tennessee business leaders last week that he expects the economy will slip into a recession even with approval of the federal bailout package.

“I think the future is going to be very cloudy,” he said. “This is the beginning of many days of reckoning.”

driving woes

Bill Camden, finance director at Herb Adcox Chevrolet, said automobile dealers are fighting rising gas prices, a slowing economy and a tightening credit market.

“This is the toughest market I’ve seen in the 19 years I’ve been in this business,” he said. “Everyone has tightened up on the amount of money they will loan, and our overall volume is down.”

Mr. Camden said he usually can work with car buyers to get them some type of financing, but GMAC and other lenders have ended loans previously offered for up to 140 percent of the value of the vehicle sold.

“Probably 80 percent of the people trading vehicles owe more than the current vehicle is worth and if they don’t have a lot of money down then they have got to finance that negative equity into a new loan,” he said. “Lenders, in order to keep making loans, have inched it up over the years to a pretty high number, and they’ve now cut that back.”

CNW Marketing Research, an automotive research company in Bandon, Ore., estimates that through Sept. 20, the share of subprime borrowers approved for automobile loans plunged from 67 percent last year to under 23 percent this year.

Car dealers who specialize in serving credit-challenged customers said they are seeing wealthier buyers come to their lots for cars since lease programs and conventional auto financing have been restricted.

“We’re definitely seeing better qualified buyers than in the past, but our sales are still off from a year ago,” said Chris Pendergrass, president of the Cleveland, Tenn.-based Buy Here, Pay Here USA. “People are more reluctant to buy right now.”

Similarly, Check Into Cash, one of the nation’s biggest payday lenders, is doing less business than a year ago because of consumer anxiety and job losses, according to Check Into Cash founder and President W. Allan Jones.

“Our customers don’t feel good about overspending, and if they don’t feel good about the economy they don’t borrow as much,” he said.

crunch at home

R. Craig Holley, chief executive of CapitalMark Bank in Chattanooga, said the biggest changes have come for homebuyers who now must put down bigger down payments and have better credit histories than in the past. But all loans are getting more scrutiny and rates on many loans have increased in recent weeks.

“Underwriting standards for a residential mortgage loans have definitely tightened,” he said. “The overall cost of credit for both consumers and businesses has increased … but we still have plenty of money to lend.”

Last week, many down-payment assistance programs that previously provided funds for homebuyers to purchase a home with no money down were stopped. Congress ended such practices as part of a housing measure adopted in July to stem home foreclosures and shore up the housing market. As part of the plan, the down payment on government-backed loans also will be increased in January.

Keith Sanford, senior vice president at First Tennessee Bank, said conventional mortgage lenders also are demanding bigger down payments and better credit records.

“If you go back three or more years, just about anybody could get a mortgage loan,” he said. “Now, in most cases, we’re requiring 10 percent down and even government-backed loans are requiring 3.5 percent down. You’ve got to have good credit and a down payment now.”

Tennessee feels pain

The credit cutbacks spawned by the bursting of the real estate bubble are likely to hit Tennessee’s economy harder than the previous recession in 2000-01 when the overheated technology industry hit hard times.

“Not all economic slowdowns or recessions are the same, and it looks like Tennessee is going to feel the effects of this downturn more than the 2001 recession, especially in our tax collections,” said William Fox, director of the Center for Business and Economic Research at the University of Tennessee.

Nonetheless, Dr. Fox said the housing industry needs to adjust to the new market realities and borrowers need to be more cautious than in the past.

“In the housing area, we made way too many loans, and that needs to now be worked out,” he said.

Jay Bell, president of Bell Engineering Co., Chattanooga’s biggest residential developer, said his company is focused upon finishing its current projects and isn’t taking on any new subdivisions.

“Everyone in the real estate industry is in a holding pattern,” he said. “The local market does not need any new housing at the moment. People who want to take out a loan to build a house still can get credit, although credit is more scrutinized than it was 12 months ago or 18 months ago.”

But Mr. Bell and area bankers contend Chattanooga should weather the economic storm from the credit cutback better than most communities.

While construction is likely to be hurt by a slowdown in building nationwide, construction in Southeast Tennessee should remain strong with plans for more than $4 billion of new projects in the area, including:

* The $2.5 billion completion of the Watts Bar Nuclear Plant in Spring City;

* The $1 billion auto plant by Volkswagen at Enteprise South industrial park;

* A $320 million upgrade of the Chickamauga Lock;

* A $300 million expansion of Memorial Hospital;

* A $280 million addition to Alstom Power Co.

Mr. Butler, a 28-year veteran of the banking industry, said economic downturns “are never fun to get through, and they usually involve going back to stricter standards for lending.”

But the SunTrust president said Chattanooga should not be hit as hard or as long by the slowdown as the rest of the country.

“Our economy tends to be more level through the cycles,” he said. “We don’t have as pronounced spikes or as big of downturns.”

Staff writer Jason Reynolds and the Associated Press contributed to this report.

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