Last week, I wrote here about how lending-averse banks are causing a hitch in the Fed’s plan to stimulate the economy with low interest rates. You can read the issue by clicking here. I concluded by asking you if you thought the tighter lending practices were a problem, and if so, what could be done to make the Fed’s economic policies more effective. Here are some of the responses I received.
Reader Alan G. wrote because he doesn’t see any problem with the current situation:
“That’s the way it’s supposed to be — not everybody should be able to buy a house — it’s costly and only the financially sound should buy homes! That’s what got us in the problem in the first place — easy credit for all. Can’t believe you actually wrote the article. Shame on you!”
A reader named Allen S. disagrees, and sounds like he has some experience trying to get a mortgage in the new lending environment:
“It’s worse than that! Banks aren’t even granting loans to anyone under 35, even if they’ve got a credit score just over 700, make around $35,000 a year, only have a few credit cards with no balance due, and with a down payment of $100,000 to even purchase any house that’s valued over 220,000!
“They won’t even consider any unearned income such as unemployment, social security or retirement income as part of their calculations towards the purchase value of the house!
“So, if you even have enough to make a decent down payment, but don’t have any substantial amount of ‘earned income,’ then you might as well forget it unless you have enough to buy the darn house outright!
“And then there’s the darn inquiries as to: ‘Where did the money come from?’ ‘Do you have documentation as proof?’ ‘Did you borrow the money somewhere else?’”
A reader named Tom R. sees a definite problem, and thinks the government, particularly Congress, and banks should all work harder to fix it:
“I read with interest the article ‘The Credit Divide.’ You raise some interesting questions that are quite relevant in today’s ‘lack of lending’ environment.
“There is no question, in my mind, that the economy is now horribly tilted towards making credit easy to get for the ones that are least likely to need it. It is a classic example of ‘Whoops... we made credit too easy for the lower income, so now let’s punish them by shutting it off!’ mentality. Banks have a history of making sure they pad their own pockets.
“That is exactly what was going on when all you needed to buy a house was the ability to walk and sign your name. Face it, who made the money during the housing bubble? Banks, underwriters and real estate agents. Every one of them had a hand in it because the easy money was flowing and why would you shut that faucet off? Now, because of their greed then, they are blaming the very people they bilked and are now refusing to serve them. Instead, to fatten the coffers even more, they are now charging those very same people countless hundreds of millions of dollars in ‘fees’ to use their credit card, write a check or even have a savings account, ‘if minimum balances are not maintained.’ It is classic blame the person that got taken, and they continue to get away with it and pay themselves huge bonuses for their ‘great business model.’
“We have an economy that absolutely needs the middle class and the lower middle class. That is where growth comes from. If you do not have first time home buyers, where are you going to sell appliances? Where are you going to sell lawn equipment? Furnishings? Remodeling supplies? All of it depends on the people climbing into the class where they can begin to afford to buy a home and begin to make those payments. That is what keeps this economy running. Somewhere our leaders have forgotten and forsaken that. Suddenly one political party wants to do what will further slow the economy, cut spending on infrastructure and job creation. And the Fed is so worried about being accused of helping the current President they are frozen in place. It appears that they are just going to let this fragile recovery slip back into recession, until more hundreds of thousands are out of work, all because the entire thing has become political. A tool to elect politicians that really have no interest in anything except their own jobs.
“The Fed should be being proactive and helping the economy get back on its feet... or stay on its feet before it buckles to its knees again. That is why they exist. The self-interested politicians should be passing legislation designed to create jobs, not be killing every piece that comes along... all, in my opinion, to keep the economy slow, or go back into recession, simply to get someone elected. Let’s face it. What is the moral and ethical right thing to do when slow economic data comes out? Jump with glee and point out how horrible things are (as we’ve seen from Mr. Romney and the rest of the Republican leadership) and doing absolutely nothing to pass legislation to create jobs? Or, perhaps, should they look at it and understand the pain many in this country are feeling and get back to work solving it? I’d suggest #2 would be more appropriate.
“So, what we have is a politically charged situation, where the party wishing to take control will allow nothing to be done until after the election so they can use the economy to win. That situation has the Fed frightened to do anything for fear of being labeled ‘a political tool of the White House.’ Lovely. Isn’t that playing with people’s lives? I suggest it is.
“And, mind you, I am a registered Republican. I am just sick of how I see both parties use the lives of Americans for their own gain.
“I’m not sure I answered any of your questions, but it is obvious more aggressive action is needed by BOTH the Fed and Congress, and I would suggest that Congress is the real culprit here. Not the White House, not the Fed. Congress bears the blame that this is happening, and they do not care. It is the most childish group of ‘adults’ I’ve ever seen... and I speak of both parties.
“It is also incumbent on banks to stop using a simple number system to determine credit. Why can’t banks get back to what they did 50 or 60 years ago... and really look into the person’s financial situation that is making the application? What did banks do before this wonderful credit score system? They took the time to look at the borrower, really examine what was going on and make the decision. Period. Why is that so hard?
“I’m not that old, but I can tell you that 30 years ago I went into a bank, did not have the money to make my house payment, but knew it was going to turn around. Guess what? My banker looked at my history, looked at my finances (which were not great then) and told me the money was in my account. My credit score (had I had one) would probably have been around 450... maybe. I paid that loan back, before it matured, and I am now retired (early) because of the faith and time a banker took. Would they do that today? HA! As you point out, if that magic number is not 750 or above... forget it. Trash that stupid system and go back to really doing some underwriting of loans. That will solve this.”
Reader Linda C. also sees some political problems, but puts part of the blame on consumers and banks as well:
“Great article and very timely considering the cliff is approaching.
“The underlying assumption to this argument about ‘what to do with the economy’ assumes it’s the Fed’s responsibility to correct the problems of the American people. It all continues the misconception that we should all get what we want NOW. It takes time, discipline and patience to acquire things in this world. If you save, manage your money and have patience, it may take you five years, 10 years or 20 years to get enough of a down payment for a house or fix your credit, but that’s what it takes.
“In generations past, and I’m only 48, I knew it would take a long time to save for a house. I did not expect the ‘best’ right out of school. That is half the problem.
“Of course the other half is more political, in that we elect leaders to help make our rules about fiscal policy when all the while they are more concerned about getting re-elected than being disciplined. So they over-promise financially and we go further in debt — only causing the American people to bear the cost. Term limits would stop this nonsense to some degree and making all public employees follow the same rules we all do.
“So yes, it’s about time part of the problem has been resolved with the banks starting to do the right thing by enforcing standards for re-payment. Until the other two areas are addressed, we’ll continue to spiral.”
An anonymous reader thinks bank regulators have something to do with it:
“The best thing that could happen would be to get the crowds of regulators out of the banks and let the banks do what they know how to do well.”
And finally, reader Bob A. proposes a partial solution that I think would be a step in the right direction:
“Based on your comments that youth tends toward lower credit scores, the obvious answer is better education on credit to youth. Seems to me many of the younger generation appear to be entitlement-oriented. Reality suggests otherwise, and someone needs to deliver that message loud and clear.”
I’d like to thank everyone who took the time to write in and participate in our discussion.
Now, on to our Investment of the Week.
Our latest Investment Digest was a special once-a-year issue, containing updates on the Top Picks for 2012 that we asked our contributing experts to send us at the beginning of the year. We do one more update on the picks at the end of the year, and I always find it very interesting to watch their performance throughout the year.
Six months in, some great stories are developing. The top performers are all in very different industries, and several of them were undervalued/underdog picks that are already beginning to pay off. Of course, you have to be a subscriber to the Dick Davis Investment Digest to get all the details, but I am going to tell you about one of the top performers today. It’s a stock from what was undeniably one of the strongest sectors of the first half of the year... despite being nearly dead a few short years ago!
The stock was chosen by Michael Cintolo, editor of Cabot Market Letter, who usually focuses on growth stocks with shiny new products and great momentum. But this year, he departed from that formula for his Top Pick, as he wrote in his original recommendation back in January:
“Throughout market history, three-quarters of all big winners have been growth stocks, those with big sales and earnings, huge profit margins and a unique and potentially revolutionary new product and service. But the other quarter of big winners have been turnaround stories, as earnings rocket higher following a tough year or two or three. Today, I think homebuilding (and other housing-related) stocks are in the midst of a big turnaround, and Lennar Corp. (LEN) could ride that wave to big gains in 2012. The company, of course, has been a terrible performer for five years as the housing bust dragged on. But, impressively, Lennar has notched five straight profitable quarters despite the horrid conditions, has recently been topping estimates and has cut costs to the bone—analysts see earnings leaping 59% next year. We’re already seeing some pickup in broad industry statistics like housing starts, which are literally coming off 50-year lows. That’s a key point—no one (including me) is calling for a new housing boom, but if activity simply moves up to average levels, it would imply a near-doubling in demand! With all the weak hands out and major signs of accumulation since the stock’s October low, I think Lennar should do very well in the year ahead. “
LEN was trading at $22 when we published that—six months later, the stock is up over 40%! Here’s Cintolo’s mid-year update, from the latest Investment Digest:
“During the fourth quarter of a very tough 2011, I noticed lots of surprising strength among stocks in the housing sector, which prompted me to make Lennar Corp., one of the nation’s leading homebuilders, my Top Pick for 2012. So far, so good! In fact, while nobody is arguing for a return to the housing bubble, more and more evidence continues to pile up in favor of a sustained housing rebound—whether it’s new housing starts, building permits (an indicator of future demand), new or existing home sales—you name it, they’ve all been reaching multi-year peaks in recent months.
“Possibly more encouraging are the numbers and the guidance from homebuilders like Lennar. The company just reported earnings on June 27, and they were fantastic—sales rose 22%, earnings were up 200% and new orders were up 40%, all crushing expectations. But even better was that the top brass said that, despite persistent worries of a new downleg in housing prices because of huge ‘shadow’ inventories, the reality is that consumers are beginning to fear missing out on the incredible affordability (low prices + low interest rates) and that inventories in many markets are extremely lean. This isn’t going to be Bubble 2.0, but Lennar is the leader in a new housing bull move that, following a six-year bust, likely has many quarters to run. BUY.”
That BUY rating means that, despite its 40% run-up year-to-date, Cintolo still thinks there’s time to get in to LEN. After all, as he wrote, this is an industry just rebounding from 50-year lows. It has a lot of recovering to do.
Wishing you success in your investing and beyond,
Chloe Lutts
Editor of Dick Davis Investment of the Week
