Credit Shows Some Improvement but Challenges Remain

- "As with the economy in general, improvement in the credit environment continues, but credit indicators are mixed and the situation remains challenging. The overall loan delinquency rate fell in the second quarter, with all loan types seeing declines from the prior quarter. Some delinquency rates are even down from the prior year, most notably for credit cards. While residential delinquency rates remain far above year-ago levels, the year-over-year difference has come down markedly. Even the much beleaguered commercial real estate sector saw a decline in delinquency rates."
- "Mortgage rates are at all-time lows. While this has led to a resurgence in refinancing, applications to purchase a home remain very low. Thus, while those who are refinancing their mortgages are benefiting from reduced mortgage payments and huge interest savings, those who want to buy a home are either not taking advantage due to concerns about further price declines, or cannot take advantage due to tighter credit standards, lack of a job or lack of equity in their homes."
- "While banks have become more willing to lend, terms and conditions are still tight, and there are differences between large and small banks. Large banks have eased many terms and conditions, while small banks continue to tighten. Standards for prime mortgages have loosened, but banks are still reporting weaker demand for consumer loans, albeit at a lower rate."
- "Consumer credit outstanding at commercial banks finally expanded slightly in the second quarter from the first, but remains below year-ago levels as some consumers have paid down debts and others remain hesitant to take on new debt amid persistently high unemployment and continued weakness in the housing market. Another important factor in the year-over-year contraction is the surge in bank charge-offs, which have quadrupled over the last four years."
- "In the second quarter, the upward trend in personal bankruptcies continued amid high unemployment and the ongoing housing malaise, but business bankruptcies, after a few quarters of declines, edged up as well. Business bankruptcies had declined recently as firms shored up their balance sheets and reported stellar profits. But the rebound in business bankruptcies suggests the business environment remains challenging, which does not bode well for strong job growth in the near future."
- "Although the stabilization in housing has helped to restart consumer spending, the pace of spending growth remains historically sluggish. We believe the housing market will remain moribund which, along with the decline in credit and lack of job growth, suggests consumer spending will not provide much fuel for near-term economic growth. Further adding to our weak spending outlook are historically low consumer purchasing plans. Plans to buy an auto, a home or a major appliance remain in the doldrums. The brief improvement in the spring was largely due to the optimism created by the homebuyer tax credit. However, we were skeptical that the pace of spending seen in the spring was sustainable in part because purchasing plans and income expectations remained severely depressed."
- "The mixed signals emanating from the credit environment suggests we still have a ways to go."

Wells Fargo Credit Quality Monitor Sep2010

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