April 24, 2023

The credit crunch is coming. Soon older Americans may struggle to access credit and home equity loans.

The fallout from the failure of Silicon Valley Bank remains with us today, despite a generous bailout courtesy of the U.S. government and the Federal Reserve. “When the banking stress first surfaced, my primary takeaway for U.S. equity markets was that it would lead to a credit crunch”, said Mike Wilson, Morgan Stanley’s chief U.S. equity strategist. In fact, the credit crunch is already begun and will leave many Americans unable to get access to numerous forms of credit from HELOCs, credit cards, and even mortgage loans. Wilson says, “The data suggests a credit crunch has started. And the data shows the “biggest two-week decline in lending by banks on record as they simultaneously sell mortgages and treasuries at a record pace to offset deposit flight”.

Simply put, banks are looking to reduce their risk exposure amidst an uncertain economy that most expect will enter Read Less

into a recession. It’s a somewhat self-fulfilling prophesy as many economists say a credit squeeze will significantly slow the economy. During Goldman Sachs Q1 2023 earnings call last Tuesday CEO David Soloman said, “The recent events in the banking sector are lowering growth expectations and there is a higher risk of a credit contraction given the environment is limiting banks’ appetites to extend credit”.

Fortune reports that The International Association of Credit Portfolio Managers released their Credit Outlook Survey on April 13th. The survey reveals a majority of respondents anticipate higher loan defaults globally in the coming twelve months. 86% of survey respondents expect defaults to rise. 

Experts expect the biggest impacts of a worsening credit crunch will be felt on Main Street USA with community banks that have financed local commercial real estate tightening lending standards in anticipation of increasing CRE or commercial real estate loan defaults, especially for commercial loans that have floating interest rates. At a more granular level, older Americans may find themselves unable to obtain a home equity loan or may find their credit card limit has been reduced by the card-issuing bank. Such reductions in available credit card limits increase the cardholder’s credit card utilization ratio which in turns reduces their credit score due to no fault of their own. Such a scenario only makes loan qualification even more unlikely.

However, there’s good news for older homeowners. While banks will be reducing the availability of credit, the federally-insured reverse mortgage or HECM, and presently private reverse mortgage loans offer a financial lifeline or increased cash flow for qualified borrowers. After nearly a decade of record-low interest rates and generous lending standards, the cash cow of credit will have far less to meet consumer demand. However, federally-insured reverse mortgage lending standards are not subject to national or regional bank lending standards but rather the guidelines set by the Federal Housing Administration. Outside of higher interest rates or a change to existing HECM principal limit factors, the HECM will remain a beacon of opportunity for qualified homeowners who may no longer get access to other loans. 

The credit crunch has begun and will accelerate this year. How will you let your local homeowners know that when one loan is declined a reverse mortgage may be obtainable?

Sources cited:
All signs are pointing to a credit crunch, says a top Wall Street strategist

IACPM Outlook Survey

by Shannon Hicks