What Does The Credit Crunch Mean To You?
This article first discusses what the credit crunch actually is and then what impact it has on you the borrower. Whilst this article is written for the UK market it is fair that a lot of the issues dealt with here will have a very similar impact on people in many other countries as most of the issues do cross the geographical boundaries that exist.
First of all lets discuss what is the credit crunch? The credit crunch that most people have heard about first started in the US. It was primarily bought about by two situations, the first of which was the way in which money was being lent and secondly how the money was derived by the lenders making the loans.
When lenders loan money it is invariably not out of their own pockets, in that it is not exactly their own money. This sort of money is known as securitised money. It is money that has been borrowed from somewhere else before being loaned on to the public. The source of this money comes from what is known in the business as money markets. Vast sums of money are borrowed from these money markets by the lenders, sometimes millions at a time. The money borrowed from the money markets by the lenders is called the tranch of money.
Once the money in these tranches of money has been divided out amongst the lending company's borrowers, the lender goes about getting more money to subsequently lend again, but the money that they have already given out is thereafter called the lending book. This lending book then has a value to investors. In a nutshell, institutional investors are looking to buy a loan so that they can cash in on the interest payable, but they don't want the hassle of borrowing the money and giving out the loans in the first instance. These are normally pension companies or large investors, and certain lending books of high quality can be very valuable to them.
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 events have taken place in the US. Secondary lenders have lent to poorer quality borrowers and as such have ended up with bad debts and in addition primarily because of the first situation the lenders that lend the huge sums to the secondary lenders have pulled out of the market. This has left the secondary lenders with no means to raise more money to lend but also they are finding it increasingly harder to sell on their mortgage books, once completed, as they carry such bad paying customers and are deemed poor quality lending books. Poor quality lending books carry a lower value to institutional investors due to the fact that they could lose money.
All this has had a corresponding effect in the UK and it is evident that many of its lending companies main source of business relies on securitised lending. Although this is not a reflection of the UK's more stringent methods of lending, it does show the caution with which the international money markets are treating the whole process of borrowing and lending.
This has also had an enormous impact on the UK lending sector as a whole with some of its famous institutions facing collapse. With the lending sector tightening its belt and the companies scrutinising their loan books it is a simple fact that present and future policy changes to safeguard their loans to the public the crunch comes down to us.
Article Source: http://www.search-raven.com
About the Author
Advice on mortgages from qualified Independent Mortgage Advisors guidance information and no obligation mortgage calculators come to Mortgage Route
This article is licensed under a Creative Commons Attribution - No Derivative Works 3.0 Unported License, which means you may freely reprint it, in its entirety, provided you include the author's resource box along with LIVE links (without "nofollow" tags).
by: ChrisClare
Total views: 25
Word Count: 701
Rating: 5.00