New York It’s a good time to borrow money for a home, car or small business.
A year after a global freeze in the credit markets prompted massive government intervention to prevent the financial system from collapsing, interest rates remain at historic lows. But banks are demanding more collateral, bigger down payments and detailed financial histories from borrowers. And that’s for people with good credit.
“Banks are going to be in a defensive posture for several years. Most borrowers can’t meet their criteria,” says Christopher Whalen, managing director at research firm Institutional Risk Analytics.
The average 30-year mortgage rate stands at 5.04 percent, after falling to a record low of 4.78 percent in April. The overnight rate that banks charge one another to borrow money — a key indicator of the credit markets’ overall health — has plummeted. The London Interbank Offered Rate, or LIBOR, stands at 0.29 percent today. It soared above 6 percent last September when fear threatened to choke off lending throughout the financial system.
But those improvements are somewhat misleading. Lending — especially for homes — is being greased by trillions of dollars the federal government has made available to banks.
The Federal Reserve has provided nearly $340 billion in low-cost loans for banks. It has purchased $625 billion worth of mortgage-backed securities to drive down interest rates on home loans. The Federal Deposit Insurance Corp. is guaranteeing about $300 billion in bank debt, which enables banks to borrow at lower rates.
The question everyone is asking is when will credit return to normal — not too loose, not too tight and not propped up by the government?
Not soon, financial analysts and government officials say. “We will not make the mistake of prematurely declaring victory or prematurely withdrawing public support for the flow of credit,” says Lawrence Summers, the White House’s top economic adviser.