So what does the future look like for borrowers big and small?
The credit crisis that began in 2007 with sub-prime mortgage defaults and moved to commercial loans in the fall of 2008 with the demise of Lehman Brothers has caused havoc for many borrowers. I believe there are several areas that will change dramatically for borrowers.
- If the economy continues to improve, banks will reduce loan loss reserves that will increase profitability and free more capital for borrowers.
- Banks will become even more conservative in their underwriting for loans. Vacant land and other non-income producing assets will get little or no value as collateral. Many borrowers will be asked to post additional cash collateral for loans. This will have the effect of reducing the borrower’s value maximizing use of cash and other near cash assets such as liquid securities.
- Many lenders will enhance “second-look” programs that use old-fashioned human reasoning to determine the pass or fail grade for a loan application. Lenders will still rely heavily on computer processing to screen loan applications but special consideration will be given to some borrowers’ circumstances that don’t fit neatly in the computer algorithm. Some loans will be reviewed and approved that didn’t pass the computer analysis the first time.
- The application process, closing conditions and servicing requirements for many loans will become more cumbersome and time consuming. Banks and loan servicers will demand more detailed reporting and access to key executives. Some lenders may require approval rights over the borrower’s operating budget and demand specifically formatted reporting. All of this may lead to the borrower spending more time on banking relationship management and reporting than on running the business.
- Banks will continue to fail and consolidate in record numbers. According to the FDIC, 127 banks have failed as of September 24, 2010. Through June 30, 2010, 829 banks with $403 billion of total assets have been identified as “Problem Institutions” which is the highest level since the credit crisis began. When banks consolidate the loss of lending supply can impact the fees and rates for bank products such as loans. Borrowers with less stellar credit will find it more difficult to get business and personal financing from a small universe of lenders.
Business and personal borrowers will be faced with new borrowing challenges and requirements. Of course, the new discipline by banks and other lenders will last as long as the lending group psychology remains fiscally conservative. As soon as a few members of the herd start to chase after fatter lending yields, all bets are off.
What challenges have you faced as a borrower in the last year? What did you do to overcome the borrowing obstacles?
Would you find any value in hiring a professional borrowing coach to help you navigate the borrowing process?
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