The financial turmoil of 2008 led many banks to tighten up credit on things like home equity loans. Thousands of people across the country got letters from their banks saying their home values had dropped and their equity lines of credit had been reduced or eliminated.
One of those letters went to Simon Wiltshire of Minnetonka. Wiltshire had intended to use the equity in his home for a business venture. He wasn't happy when he learned the equity was no longer there.
"They revalued our house with a decline in value, from their own earlier estimate of $800,000 down to $525,000, which put it below the line of equity that we had out. So they were basically terminating our line," Wiltshire said.
Wiltshire finds it hard to believe the value of his home dropped 35 percent in just a year -- and he's probably right.
A report released this week shows home prices in the Twin Cities metro area were down about 16 percent over the past year. Wiltshire figures some banks were simply pulling back the reins on credit to increase their liquidity.
“If (interest) rates remain at these levels... I think that will get a lot of people off the fence and buying properties they're looking at.”Carlos Gutierrez, mortgage banker
"I think we're all in the same boat, in the sense that we've all sort of worked over the last years to take advantage of our growing equity value," said Wiltshire. "And just like everybody else, it all can come crumbling down around us. It caused a lot of people, including us, to reassess where we are financially."
There's other evidence that banks have tightened their lending practices.
The Federal Reserve Bank of Minneapolis conducted several recent surveys that show about half of regional banks raised their loan standards for both consumers and businesses. Larger banks, especially, require more documentation, larger down payments and higher interest rates.
The surveys show that despite the perception and fear of frozen credit markets, banks still have plenty of money to lend.
The problem is, fewer people are borrowing. The real estate market is in a rut.
That means business is slow for Carlos Gutuerrez, who's president of a mortgage company in Minnetonka. Gutierrez says the good news is, interest rates on home mortgages recently dropped to their lowest levels in four decades. That makes him hopeful that this year will be better.
"I think if rates remain at these levels, of 4.5 to 5 percent, I think that will get a lot of people off the fence and buying properties they're looking at," Gutierrez said.
While the financial crisis meant big changes in lending practices at larger banks, many smaller banks in greater Minnesota are less affected.
Scott Turn is a commercial lender for the family-owned Security BankUSA in Bemidji. Turn says the bank has been managed prudently, and is using the same lending standards it's always used.
"Had we been in some other market, I think there probably would have been some things that we might have had to change," said Turn. "But our bank has been around 100 years, and a lot of banks like ours in northern Minnesota just didn't get into those things that put the banks' stability at risk at all."
Turn says lending is down, though. Fewer people are buying homes and cars. Small businesses are less willing to borrow for expansion. People are reluctant to take on more debt because they're worried about their economic future.
In just the past few weeks, though, the bank has been getting more calls from people interested in refinancing their home mortgages. Turn thinks the low interest rates will be good for the economy.
"I think this year can't be too much worse than last year," said Turn. "So I'm optimistic that with the interest rates down, and just the feeling that we maybe have some change going on at the national level, that people's perception will change a little bit here, too."
Observers say banks are still trying to find the right balance with their money lending practices. Loan standards that are too tight could squelch market activity. Standards that are too loose could encourage more reckless borrowing.