Friday, January 25, 2008
Basically, Wirz is saying what I posted here back in July 2007. He doesn't want to be even more alarmist, but he acknowledges that a lot of people are going to lose their access to credit, and even, possibly, places to live, as a result of this crisis. Meanwhile, as noted by Justin Raimondo, in an incisive column today, our imperial policies are playing a central role in the country's economic collapse.
Q: You've been here since 1984 and seen all the cycles, up and down, good and bad. And this is the worst credit problem you've ever seen in Sacramento?
A: The reason I say that is this is touching not just the people who have traditionally always been a problem, which is people who have lower credit scores. In every crisis, when we first have a downturn, it's the people at the bottom of the economic pyramid who seem to experience the worst outcomes.
I think what surprised us was in this downturn we're seeing people who had, at the outset, relatively good credit having negative outcomes.
Like most lenders we use the Fair Isaac credit scoring system, the FICO score. In this downturn, where we analyzed the folks having problems, we saw a disproportionate number of people in that 680 to 719 credit score. And those are people who generally don't have a lot of credit problems. They tend to do pretty well. We give them the benefit of better rates and fairly liberal credit because they have a history of repaying their obligations. That was a real surprise in this credit cycle.
Q: You've said you saw the problem start in September with auto loan delinquencies. What explains what you're seeing?
A: It makes sense in retrospect. You kind of prioritize your obligations. You do that. I do that. I think, for a lot of people, the most important thing was to hang onto their house. This is primarily a problem of people having too many bills and not enough income to cover them. So they began juggling their bills. Credit cards, auto loans, things like that took second place to keeping the mortgage payment up.
I think that's why we started seeing it in auto loans. We've seen it in credit cards, and now most recently, we've seen it in real estate loans. People have done everything possible. We've seen a lot of the credit cards and home equity lines get fully utilized as people have drawn them down to support their monthly expenses.
I think we're now at the end of that rope. There just isn't any more credit card balance available. There isn't any home equity available, and now people are having to confront the ultimate problem, which is how do I keep my house? How do I keep my mortgage intact? I think that's why we're seeing people coming in.
Unfortunately, for all of us, the members and for us, we'd have been better off had they contacted us earlier in the process. There's more we can do earlier in the process than we can do at the last instance of them being out of all other alternatives.
Q: You say we're at the front end of this credit crisis? How long might this continue?
A: In almost every kind of lending problem it takes 18 to 24 months to work through it. I hope this one is a problem we can work through that quick. I've heard some others say it might not be.
One of the problems in this is for every one of these people who ends up going through a foreclosure, or ends up going through one of these programs, it's a significant hit to their credit. That can take up to seven years on their credit report to go away. It's going to impair an awful lot of people for an long period of time.
At some point we're going to come back and ask the question: What are we going to do to rehabilitate all these people who have had these problems? My guess is there's going to be some accommodation for that down the road. It's too early to talk about that now. But it has to happen. There's too many people that have been affected.
Q: So this doesn't end when the housing market hits bottom? We're talking about lots of people with ruined credit for years. What will that be like?
A: Your credit report affects more than just your borrowing. I was struck by something Sheriff (John) McGinnis said when he talked to us not too long ago. He said one of the top problems they have in hiring deputies is they run a credit score on the new deputies. He says you can't have a deputy that has credit problems out there. You're always wondering, is he going to be subject to bribes or some other issue?
When you rent an apartment these days, what do they do? They run a credit report on you. Credit, and your credit score, affect so many things other than just loan availability.
Again, that's why I say at some point we're going to have to go back and say we had a major credit crisis here. And that it affected a lot of people to an extent greater than maybe should be attributed in total blame just to the borrower. I think at some point there's going to have to be some accommodation by the credit-scoring world to give some allowances to some of those people. Otherwise, we're going to be punishing them for an awfully long period of time by having all the negatives that come with having poor credit.
Q: You described this long aftermath of people still struggling with their credit problems as a potential hole in the economy.
A: I think it punishes the larger economy. My wife is a teacher, and so many of the problems we see in families, probably in our schools, come from people having financial struggles, among others. There will be other consequences to this in terms of how it affects families, and I think that has to be weighed into this as well.
Q: Earlier you said that homebuyers are bypassing sellers altogether and waiting for a bank to take back the home. They think that's where the better deal is. When do you see this housing market starting to stabilize?
A: We'll know there's a turnaround when we see buyers come in and buy these properties earlier in the process. Right now, were not seeing that. People are waiting for the bottom. Everybody wants to buy at the bottom, and there cannot be a bottom until buyers come in. We're not there yet. My guess is we're maybe into April, maybe June or July, before we see that.
Q: And then what happens?
A: I wouldn't be surprised to see this take two years to get back to something that approaches normal. The one thing we have going for us is this is an extremely desirable area. We have a lot of things that are attractive to people who want to live in this area.
If the state resolved its budget problems and state employment remains steady, that's a tremendous underpinning to this area. About 12 percent of all the jobs in this area are state jobs, and that's a great underpinning [NOTE: the state of California currently has a 14-18 billion dollar budget deficit, and public employment is under pressure nationally from declining property tax, capital gains and sales tax revenue].
I think an ominous sign for us, when this thing first started, we didn't see a lot of our problems coming from unemployment. Now we're starting to see people in the real estate and construction industry have layoffs, for obvious reasons. To the extent that unemployment goes up, that's going to add to the problem. We're just now starting to see that. How long does it take for that to fully stabilize and work itself through? I'm not sure. But that generally is going to take a period of time to resolve itself.
My guess is June and July feels like the period we might bottom out, and then after that we'll start to work our way back up, and in two years we're back to something you might call normality.