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Credit Freeze Now Melting? Not as Fast as You Think

It may be too early to tell if this trend will continue.

Businessweek recently posted an optimistic report about the renewed interest in the bond, notes and commercial paper market. Although companies are willing to pay higher yields because of the possibility of default, businesses are finding it less stressful to seek capital from the public instead from the banks. According to the report, “Global sales of new corporate debt jumped to $82 billion last week, the highest since $103 billion last May and nearly double the level seen right before the credit crisis intensified in September, according to data-tracker Dealogic.”

But we also agree with the statement that there is still danger visible in the mortgage market. For one, distressed banks have not yet unloaded their toxic mortgages causing them to take more caution when lending. In fact, the gloomy economic figures from mounting joblessness and lower commercial sales during the holidays prove that there is a much needed rebuilding of consumer confidence this year. Of course, it would only be possible if the government’s proposed stimulus projects can actually work in the worst recession that we have since the Great Depression.

So too are the falling home values that linger in the Case-Shiller Indices for more than a year now. When in fact the country has bargain houses that are plentiful in supply, homebuyers are experiencing setbacks on their own. First, speculation plays a large role in lowering the glut of houses since many are waiting for even lower home values and mortgage rates in the coming weeks before they purchase. Second, mortgage qualifications remain high despite low rates in the market. The market fears for a further collapse and it can only counter default risks by screening borrowers tightly. Applications may surge but lending is still limited.

The slight recovery in commercial lending should work on alleviating the loss of confidence in investments. Good news can trigger psychological reaction as bad news can also produce adverse market responses. However, we should keep in mind that banks still provide much of the lending to meet industries’ expenses and expansions and wait for the restoration of healthier financial and property markets.

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