The aim of this article is to explain the credit crunch and explain how it may have an effect on you as a borrower. Bearing in mind that this is very variant depending on who you talk to, which company you use to lend and where in the world you are. But this is an overview.
Let’s start by explaining what the credit crunch actually is. The term, and the situation as we know it, began in the US, and was caused by two primary reasons. Firstly, the way money was being lent and also the way in which the lenders were procuring the money which they were lending have caused the problem.
The majority of lenders lend money which they don’t actually have. Nowadays, strictly speaking, they can’t lend money they don’t have, but they can lend money which isn’t entirely their own. They lend what is called securitised money. Securitised money is the name given to money which is borrowed from elsewhere and then passed on to the borrower. This money is normally sourced from what are called the money markets. Lending companies will borrow huge amounts of money at a time from these money markets, in some cases many millions at a time. These amounts of money are referred to as a tranch of money.
Once that tranch of money has been lent to borrowers, they then set about borrowing more but what has already been lent is known as a lending book. That lending book has a value to institutional investors. Institutional investors are people such as pension companies or large investors who want to own loans lent to others that are going to be repaid but don’t want to go through the hassle of actually lending it in the first place and dealing with the end user. Lending books depending on their quality can have quite a high value.
It is the quality of these lending books that plays such an important role as to why we have a credit crunch at all. Ideally, a lending company would obtain a tranch of money for lending at a set rate. They would then lend this money to their borrowers at a percentage higher than that, and would therefore be making a profit. However, there are two significant possibilities which can ruin this ideal situation. The first is if the secondary lender lends poor quality money to the public. That is to say that some or all of that money has not been paid back and so is not effectively there to lend. The other possibility is if the money being distributed by the primary lenders, the distributors of the tranches of money, runs out.
Both these scenarios have occurred in the United States. Erratic payment and non payment of loans obtained
by the public have left the secondary lenders with a trail of bad debt on their lending books which have in turn led the institutional investors to leave the markets. This has a subsequent effect on the secondary lenders in that there are less institutional investors to borrow money from and the ones that remain will be far more scrupulous in scrutinising the loan books before putting their money forward, and so continues the downward spiral. The secondary lenders need money to borrow and continue on but the investors are not willing to invest in what they can perceive from the loan books to be bad debt and therefore bad investment opportunities.
The credit crunch, coupled with sharply rising prices of fuel, food, housing and basic utilities, has led to much discussion in the media about the possibility of a recession. A recession is a time of general economic decline and could ultimately see a lot of businesses losing money, and having to cut down on the number of employees. It is likely that during a recession, the cost of living will rise even more and it will be even more difficult to borrow money if you need to.
Nobody knows how long the current credit crunch will last, or if it will result in a recession. One of the safest things you can do to relieve the pressure of the credit With a clear indication of where your money is going, you will find you are much better suited to deal with any unpredicted financial fluctuations. crunch is to watch what you spend by setting up a monthly budget, which can be easily done using most spreadsheet packages.
The overall outcome of the credit crunch means in the housing market means that it is harder to obtain a loan to finance any purchases. Registered Valuations are needed in many cases where large finance deals are needed. This is so that the bank can have some security in what they are lending to purchasers. When wanting to buy yourself a home the safest bet is to have some savings, little or no outside debt and possibly some equity. This will make sure you have a strong chance to be able to buy and be approved for a loan.
Article Sourced from a brilliant website named Mortgage Route