Straight Talk: Lending Facts

"Banks aren't lending." You've probably heard that statement a lot in the last six months. Bankers respond, "customers aren't borrowing." Both statements are true; in classic "chicken or egg" fashion, the question is really about which is causing the other.. Ron Feldman of the Minneapolis Fed confirmed declining lending trends during a briefing with reporters. (See story here). He said the lending slide is the result of both tightening standards by banks and weaker demand from borrowers. He emphasized that banks make money by lending so they have no incentive to turn away good credits.. Two important developments shed light on the weak demand for loans. First, the utilization rate of existing lines of credit is at a historic low, by anecdotal account. Many bankers are reporting total credit line utilization of around 25 percent, about half of traditional norms. Borrowers who have lines of credit tend to be the best customers out there; if even they are not using the borrowing capacity they have, it should come as no surprise that other customer segments aren't borrowing either.. Second, in a major reversal from a few years ago, people are putting money into their homes instead of pulling money out. Freddie Mac reported that in the fourth quarter 46 percent of homeowners who refinanced lowered their principal by paying in additional money at the closing table. This is the highest "cash-in" share since Freddie Mac began keeping such records in 1985. "Cash-out" borrowers represented only 16 percent of all those to refinance. If financing turns the home into a giant ATM, then the current trend has more people making deposits than withdrawals. A few years ago, a cash-out refi was one of the surest ways for a small business owner to obtain credit, but apparently, those folks don't need the money the way they once did.. Oddly enough, as interest rates rise, we might see a statistical increase in bank lending. Banks are recording virtually no residential mortgages in their loan portfolios because they sell every mortgage they underwrite to Fannie or Freddie. Who can compete with their low interest rates? But as rates rise, banks may be able to compete on 10- and 15-year mortgages and begin holding some of those loans. This would show up in the lending statistics for the banking industry, whereas nothing shows up when a bank originates a mortgage for sale into the secondary market.. Some people want to blame banks for the slow economy, but the facts destroy the credibility of that claim. The current environment demonstrates that most banks serve their communities in periods of robust economic growth and also during the doldrums.