The crisis's aftershocks can still be felt © Andrey Burmakin/Shutterstock.com
The crisis’s aftershocks can still be felt

It’s now been five years since the investment bank Lehman Brothers filed for bankruptcy protection, weighed down by billions of dollars’ worth of losses due to the mortgage market, touching off a panic that continues to have wide-ranging implications for the financial industry and American consumers.

“The markets were shocked by that because they assumed it couldn’t happen,” says Richard Sylla, a professor of economics and financial history at New York University. “That was really the worst part of the crisis.”

Stock values plunged, eventually falling to half what they had been at the peak, followed soon after by a crash in housing prices. Financial institutions reacted to their losses in the mortgage markets by drastically cutting back on loans to consumers and businesses to protect the capital they had left.

“There was a definite pullback in lending,” Sylla says. “It became very much harder to get loans, and, of course, this contributed to the recession and the rise in unemployment.”

The government response to the crisis also has had significant aftereffects. It started with massive bailouts and so-called quantitative easing by the Federal Reserve, and led eventually to the Dodd-Frank financial reform law and a host of new regulations and requirements for financial firms.

Taken together, these aftershocks from the crisis are still affecting financial services Americans use every day. Here’s a breakdown.

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Mortgages become harder to get

Mortgages become harder to get © zwola fasola/Shutterstock.com

Most consider the then-out-of-control housing sector to be one of the root causes of the financial crisis, so it’s no surprise that mortgage lending has seen substantial change.

Today, banks are stricter about their credit requirements, says Ed Conarchy, a registered investment adviser and a mortgage planner with the Cherry Creek Mortgage Co. based in Gurnee, Ill.

“It wouldn’t be unheard of getting something done in the mid- to high-500s before the crisis,” Conarchy says, referring to the credit score necessary to secure a mortgage. “Now, once you slip below 620, it’s really hard to do, and when you’re in that 620 to 680 area, it’s not as easy as it once was.”

New regulations put in place by the Consumer Financial Protection Bureau, requiring lenders to make sure borrowers have the ability to repay a mortgage loan before they provide one, also have changed the way mortgage brokers operate.

“We could wing it a lot easier in the old days,” Conarchy says. “That’s not the case anymore. The client needs to have all his paperwork together.”

Still, forcing brokers to sweat the details isn’t necessarily bad, Conarchy says.

“Everybody says it’s tougher for lending nowadays. I disagree,” he says. “I’ve been doing this for 23 years. I think lending is just back to where it was before. You need to have good credit, and you need to have income.”

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Banks close branches

Banks close branches © Mark Winfrey/Shutterstock.com

After decades of growth, the financial crisis touched off a wave of bank failures and branch cutbacks that are still in effect, says Sam Kilmer, a senior director at Cornerstone Advisors Inc., a financial industry consulting firm in Scottsdale, Ariz.

“With the crisis, there was a lot of consolidation,” Kilmer says.

The banks that have survived that wave now have to contend with new regulations designed to protect consumers but that are also expensive and complex for banks, Kilmer says. While some bank fees have increased, limits have been placed on overdraft and swipe fees.

Another factor is margins, says Bert Ely, a banking consultant in Alexandria, Va. Banks make money on the spread between the rate they pay to depositors and investors, and the rates borrowers pay on loans, known as the net interest margin. The Fed’s push to revive the economy with low interest rates has cut into that margin substantially, Ely says.

“That’s what put banks in a real squeeze, plus regulatory down pressure on fees,” Ely says. “I think it’s a driver in branch closings and banking consolidation.”

Banks’ troubles have had consequences for consumers as well as banks trying to wring more profits out of customers. In 2009, 76 percent of checking accounts were free, according to Bankrate’s Checking Survey. By 2012, that number had fallen to 39 percent.

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Credit cards become more consumer-friendly

Credit cards become more consumer-friendly © Pressmaster - Fotolia.com

In the wake of the crisis, banks have cut back drastically on credit card lending. In a Federal Reserve survey conducted October 2008, 60 percent of bank loan officers reported tightening standards on credit card lending, compared to just 28 percent the year before.

But while the pullback in credit card lending was hard on consumers, between the 2009 Credit Card Accountability, Responsibility and Disclosure, or CARD, Act and the Dodd-Frank financial reform law, the aftermath of the financial crisis actually benefited them in several ways, says William McCracken, CEO of Synergistics Research Corp. in Atlanta.

“Since the crash occurred, there has been a number of regulations that, in general, have led to more consumer-friendly practices by credit card issuers — greater disclosure, additional time to make payments, more notification when rates change,” McCracken says.

The Fed’s relentless quantitative easing also has provided an unexpected benefit — lower interest rates.

“Consumers who tend to be revolvers when it comes to their credit card usage now are experiencing significantly lower rates than they would have 10 years ago, or prior to the crash. So it’s, again, a more attractive product than it was pre-crash because of that,” McCracken says.

Still, those rates are likely to rise once the Fed backs off its easing program, so watch out.

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2008 market haunts investors

2008 market haunts investors © morrison77/Shutterstock.com

Even as the stock market has recovered and even reached new all-time highs, that gut-wrenching drop continues to haunt investors, says Michael Gayed, CFA, co-portfolio manager of the ATAC Inflation Rotation Fund offered by Pension Partners LLC, an investment advisory firm in New York.

“What’s changed is the speed with which people react to any kind of volatility because most, especially on the individual investor side, are still scarred by what happened in 2008,” Gayed says.

That’s led to investors being more skittish and quicker to abandon their stock portfolios when the markets have a bad day, he says.

“There is always this temptation to assume that an extreme event like that tends to repeat year after year, which is why we’ve seen, in general, not too much excitement in stocks and all this skepticism,” Gayed says.

Technology is compounding the problem, he says.

“Anybody can log on to his account and see the value of his stocks, his bonds any second of the day on their phone, and most individual investors fail to understand that there is noise in price movements,” Gayed says.

That can ultimately lead to rash behavior that ultimately undermines investors’ long-term returns, Gayed says. It’s also made investment managers much less likely to take risks to increase returns beyond what you might see in an index for fear of losing clients over short-term volatility, he says.

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Stock ownership versus returns

Stock ownership versus returns

After recessions in 2001 and 2008 — the latter known as the Great Recession — Americans have become wary of investing in the stock market at the same time that the market has risen markedly after each recession.

The graph shown illustrates this point, comparing data on the percentage of Americans who say they own stock compared to the run-up over the past several years of the Standard & Poor’s 500 index.

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