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Mortgage Mayhem Doesn’t Seem to Be Contagious for Other Types of Credit

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RISMEDIA, August 21, 2007—(MCT)—There is a severe credit crunch in the home mortgage market, but there should be few problems for consumers seeking other types of credit, such as car and personal loans, experts said Friday.

“It hasn’t been a problem at all,” said John Chase, president and owner of Chase Chevrolet in Stockton, whose primary financing source is GMAC.

“We just had a semiannual meeting with them, and the delinquencies actually are at an all-time low,” he said Friday.

There’s little change in personal lines of credit, said Steven Rosso, president and chief executive officer of Pacific State Bank in Stockton.

The real impact remains on the mortgage side of the business, including home-equity loans, which have become more expensive, require more documentation and are harder to come by.

“I’ve even noticed some entities aren’t even doing home-equity loans,” Rosso said.

One area of consumer finances indirectly affected by the mortgage market woes might be in interest rates paid on certificates of deposit.

With the Federal Reserve having cut the discount rate to 5.75% from 6.25% on Friday to make it easier for banks to borrow money, they will offer their consumer depositors less return. The discount rate is what the Fed charges banks.

“CD rates will come down,” Rosso predicted.

But the real estate downturn has had and will continue to have a major impact on consumers, said Michael Duffy, president and CEO of Financial Center Credit Union.

“We saw in March a surge of individuals coming in for signature consumer loans,” he recalled.
Looking into the underlying cause of the unusual demand, the credit union found many of the applicants held adjustable-rate mortgages whose payments were rising.

“There were a lot of people who were having their rates adjusting and were not prepared for it and were looking for loans to see them through until they could figure it out or they could refinance,” Duffy said.
The crunch came in when the credit union had to turn many away.

“In most cases, those folks coming in are already at a high debt-to-income level, and it’s impossible to lend to them,” Duffy said.

The Fed’s move is well-timed to bolster consumer confidence, which is vital to sustained economic vitality, said Amin Elmallah, dean emeritus of the College of Business Administration at California State University, Stanislaus.

“When people see others in trouble, they are reluctant, psychologically reluctant, to buy expensive goods; reluctant to move out of their homes and buy another home; reluctant to buy, period,” he said.

The central bank’s interest rate cuts, as well as falling prices for gasoline and fuel, may help reverse those feelings, he said.

“I think with these two things together, the consumer is going to feel better about the future of the economy, and that is going to help,” Elmallah said.

Still, Duffy worried that the mortgage credit crisis would prove a major hit on the Central Valley economy, which has been booming until recently, powered largely by an influx of former Bay Area residents seeking more affordable real estate and an explosion of new-home construction to fill their demand.

“I don’t see good times for us,” Duffy said.

Any recovery is still at least a couple of years off, and the near-term future could be bumpy, he said.

“We’ll either go sideways from here or we’ll go down,” Duffy said.

Copyright © 2007, The Record, Stockton, Calif.
Distributed by McClatchy-Tribune Information Services.

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