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The credit crunch is history, the recession is officially over, and banks are sitting on something like $1.5 trillion in cash.

So why is it still so hard for many people to get loans?

The Federal Reserve says most lenders have stopped raising their standards, but that's not the same as throwing wads of cash at people, economists note.

"If you're already extremely tight and you stop tightening, that's not easing," said Paul Kasriel, the chief economist for Northern Trust. Furthermore, he doesn't expect conditions to dramatically improve borrowers' prospects anytime soon. "There's no magic bullet that will change this," he says.

What's happening is continued fallout from the financial crisis and recession. Commercial real estate loans continue to go bad, and foreclosures in the residential market are far from over. As home values keep dropping, more people who could afford to pay their mortgages are choosing not to, allowing their homes to go into foreclosure. Currently, these strategic defaults are responsible for about one out of three foreclosures.

From a banker's perspective, these trends are reason enough to be cautious about lending right now.

"Some loans you thought were good on your books may not be good," Kasriel said. "If you use your capital today to make loans and you have more write-downs, you could find yourself undercapitalized."

Banks are required to keep some money in reserves against losses. Falling below these required levels could cause the banks to face regulatory scrutiny or even takeover. So lenders cling to tough standards, focusing most of their attention on low-risk lending to those with good to excellent credit scores.

Liz Weston

Liz Weston

Here's a look at three major areas of lending -- and how you can improve your chances in each if you need a loan.


A quick history lesson, for those of you who weren't paying attention: Until 2006, when home prices peaked, lenders competed fiercely for customers, and lending standards were loosened considerably -- to the point where you could get a mortgage without proof of your income or assets. Even those with lousy credit scores could usually find someone to lend them money.

Those loose lending standards came back to bite lenders as first subprime mortgages and then mortgages in general started defaulting in huge numbers. Derivatives and other financial products created by Wall Street firms to amplify profit from these mortgages wound up multiplying the risk and nearly brought down the financial system.

Since the crisis, investors have balked at buying mortgages that don't come with government guarantees. Today, 90% of home loans have those guarantees. Fannie Mae and Freddie Mac, government-sponsored entities created to encourage mortgage lending, and the Federal Housing Administration buy loans from lenders and repackage them for sale to investors with guarantees to make them whole if borrowers default. Before the recession, about two-thirds of loans made had government guarantees attached.

The reduction in the market for mortgages made outside the government-backed system means fewer options for borrowers. The only good news, said Matt Hackett of direct lender Equity Now, is that Fannie, Freddie and the FHA are no longer constantly changing their lending standards, so borrowers are encountering fewer surprises and last-minute demands for documents than they might have a year ago.

"It's much easier to get a handle on it," Hackett said. "The guidelines don't change every week or every day."

Fannie and Freddie guidelines favor those with decent credit scores (FICOs of 680 and above), a 10% down payment and steady incomes documented by two years' worth of tax returns. Those with lower credit scores or smaller down payments often wind up shunted into FHA loans, as the FHA handles nearly all lower-credit-score applications.