The Stories That Shaped 2008, No. 7: Housing market meltdown leads to tightened lending

The financial crisis - which experts ultimately labeled a recession - hit banks hard in 2008, and institutions were increasingly reluctant to issue loans, both to consumers and businesses.

Relaxed lending standards and risky underwriting in previous years were cited as major contributors to the meltdown.

Fannie Mae and Freddie Mac, which had for years bought and guaranteed subprime and Alt-A mortgage loans, bordered on bankruptcy in 2008, prompting a $200 billion government bailout.

The effects of the financial crisis weren't seen as drastically in the Ozarks, but many banks reported a more cautious approach to lending as the year went on, and a number of developers said they faced problems in obtaining financing for projects.

"It was a gradual process throughout the year, but the acceleration clearly happened in the springtime," Bank of America southwest Missouri Market President Jamie Esch said. "Home valuations at that time were starting to plummet on both the East and West coasts, and that triggered the perfect storm in regard to lending and the investment industry."

Esch said local lending remains strained as the year comes to a close.

Banks are requiring more money down, higher credit scores and better documentation from consumers and businesses looking for loans.

Institutions such as Springfield-based Great Southern Bank, Metropolitan National Bank and Commerce Bank reported slowdowns in commercial lending in the third quarter.

"We had a relatively large portfolio of construction development loans, and we're not making those loans to the same extent that we were," Great Southern President Joe Turner told Springfield Business Journal in November. "Our customers have become more cautious in their approach, and we're more cautious as well."

A potential upside of the financial mess is that stronger lending practices ideally will lead to fewer loan defaults.

That effect likely would trickle into the mortgage industry and bring down the number of foreclosures - also at record levels in 2008.

Another silver lining: Interest rates have been steadily falling as attempts are made to stem inflation.

Esch predicts that banks will begin heavily marketing home refinancing to take advantage of lower interest rates, particularly in the Ozarks where he said property values haven't declined as much as other areas of the country.

To help banks weather the stormy economy, the U.S. Treasury stepped up in the fall with its Capital Purchase Program, a plan to buy up to $250 billion in preferred bank stock as a way to infuse capital into the system.

Theoretically, the boost would loosen dollars and get lending flowing again.

Numerous banks, including Great Southern, Springfield-based Mid-Missouri Bancshares and U.S. Bank, applied for funding through the program.

On Dec. 5, Great Southern completed its sale of 58,000 shares of stock to the Treasury for $58 million.

Officials with Springfield-based Mid-Missouri reported that the bank was eligible for $15 million in Treasury funds, and U.S. Bank received a whopping $6.6 billion.

In the year ahead, Bank of America's Esch said the general consensus in the industry is that lending will remain tight and begin to thaw at the end of 2009 or in early 2010 - if the economy has already seen its darkest days.

"It's purely speculative right now, but the only way we know if things are going to get better is if we've already seen bottom," he said. "And we don't know if we've seen that yet."