Credit Market Makes Economists Nervous

Interest rates are low and home prices are down, but banks continue to be stingy with loans.

At the height of the housing boom, seven out of 10 mortgages were approved. At the end of 2008, only five out of 10 got the green light. During the boom years, homebuyers could qualify for the cheapest rates with a credit score of 660. Today, they need 740 or better.

"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.

Consumers cut back borrowing by $21.6 billion from June to July, the biggest drop since the Federal Reserve began keeping records in 1943. That made some analysts nervous.

The reduction in borrowing could slow the economic recovery, says David Olson, president of Access Mortgage Research & Consulting.

"If they cut back, it would be catastrophic," Olson says. "We could have a second downturn."

Source: The Associated Press, Stevenson Jacobs (09/17/2009)