Is throwing money at the mortgage market the solution?
You may have noticed over the last month many countries have past bills in their governments to inject substantial amounts of cash into their banking system. They have done this on the understanding that all the bad loans also known as toxic debt is weakening the institutions and rendering us unable to borrow money so leaving us all worse off as a result.
But the big question on everyone's lips is, will this have the effect of kick starting the institutions lending again, and if it does, what how will it affect the individual and the public in general. The analysis off this problem will be based on the UK as that is where my financial experience stems. The situation within the UK may bare similarities with that of other countries but I am not in the position to comment on whether the outcomes would be similar or not because I would not be as au fait as to how their markets tend to function.
The general public is under the impression that the credit crunch is due to the banks not having enough money to lend. Logic would then dictate that by giving the banks more money the problem is resolved. Unfortunately this is rather far from the truth. The lack of money to lend is only the tip of the iceberg. Banks have been burned by the bad debt accrued over the last few years and are therefore now much more cautious about lending again. Their careless actions in the past will prove much more difficult to rectify in times to come.
One of the principal areas to focus on when assessing the reasons for our present financial crisis is the area of house prices. As everyone knows they have taken a big tumble and there would seem to be no respite in the immediate future. Lenders are now facing a situation in which they have to implement more rigorous procedures and one of the targets is that of loan to value, or LTV, which is the amount that they are willing to loan dependent on the value of the property. They were lending from 95%LTV up to a staggering 125%LTV.
Most experts will agree that as long as the market is buoyant, this lending is alright. If you take into account that the market was rising at a rate of 10%, lending 125% on a property of 100,000 means you are lending 125,000, but with that 10% rate of increase in value over just 3 years your LTV has already dropped to around 93%. In a buoyant market, this sort of lending would be considered a calculated profitable risk and was therefore given the o.k..
But the problem that we face is that house prices are going in the opposite direction. The decline is at least 10% and analysts figure that it could get worse. So, if 100,000 was lent on an 85,000 property then in the same three year time span the loan could have actually increased to 118% LTV. Now I am sure you would agree that in this present climate that this sort of loaning is both irresponsible and detrimental to all involved.
So what does the future hold for the market and will the bailout be the solution to the problem. Well I can only give my own personal professional opinion and nothing is set in stone but realistically I would perceive the bailout as having very little effect. They simply cannot lend at the high loan to values even though they have been committed in 2009 to lend at the levels reached in 2007. You see the majority of loans being agreed at present are dealing with people coming out of rates that had been pre-arranged over the last 5 years. Due to the downward spiral of house prices these people are going to be pushing the LTV up.
You also need to take into account that a lot of people in the last few years have acquired mortgages on a self certification basis. These sort of mortgages are now considered high risk for lenders and so are mostly unavailable, and even if they are available they will be at greatly reduced LTVs, so what options do these people have to chose from?
So whilst I do welcome the money that is being injected into the finance market I sadly think that whilst property continues to fall and lenders fail to have the pre 2008 appetite for lending it is more than likely just going to be stockpiled. This will have a domino effect as house prices will continue to fall because of the lack of lending at the right LTV with the right lending criteria which again will make lenders even less willing to lend. I have to say this is quite a quandary and I honestly don't see how it can be stopped until someone has the bravery to just lend knowing the calculated risk it represents I think it is fondly known as taking a punt!.
But the big question on everyone's lips is, will this have the effect of kick starting the institutions lending again, and if it does, what how will it affect the individual and the public in general. The analysis off this problem will be based on the UK as that is where my financial experience stems. The situation within the UK may bare similarities with that of other countries but I am not in the position to comment on whether the outcomes would be similar or not because I would not be as au fait as to how their markets tend to function.
The general public is under the impression that the credit crunch is due to the banks not having enough money to lend. Logic would then dictate that by giving the banks more money the problem is resolved. Unfortunately this is rather far from the truth. The lack of money to lend is only the tip of the iceberg. Banks have been burned by the bad debt accrued over the last few years and are therefore now much more cautious about lending again. Their careless actions in the past will prove much more difficult to rectify in times to come.
One of the principal areas to focus on when assessing the reasons for our present financial crisis is the area of house prices. As everyone knows they have taken a big tumble and there would seem to be no respite in the immediate future. Lenders are now facing a situation in which they have to implement more rigorous procedures and one of the targets is that of loan to value, or LTV, which is the amount that they are willing to loan dependent on the value of the property. They were lending from 95%LTV up to a staggering 125%LTV.
Most experts will agree that as long as the market is buoyant, this lending is alright. If you take into account that the market was rising at a rate of 10%, lending 125% on a property of 100,000 means you are lending 125,000, but with that 10% rate of increase in value over just 3 years your LTV has already dropped to around 93%. In a buoyant market, this sort of lending would be considered a calculated profitable risk and was therefore given the o.k..
But the problem that we face is that house prices are going in the opposite direction. The decline is at least 10% and analysts figure that it could get worse. So, if 100,000 was lent on an 85,000 property then in the same three year time span the loan could have actually increased to 118% LTV. Now I am sure you would agree that in this present climate that this sort of loaning is both irresponsible and detrimental to all involved.
So what does the future hold for the market and will the bailout be the solution to the problem. Well I can only give my own personal professional opinion and nothing is set in stone but realistically I would perceive the bailout as having very little effect. They simply cannot lend at the high loan to values even though they have been committed in 2009 to lend at the levels reached in 2007. You see the majority of loans being agreed at present are dealing with people coming out of rates that had been pre-arranged over the last 5 years. Due to the downward spiral of house prices these people are going to be pushing the LTV up.
You also need to take into account that a lot of people in the last few years have acquired mortgages on a self certification basis. These sort of mortgages are now considered high risk for lenders and so are mostly unavailable, and even if they are available they will be at greatly reduced LTVs, so what options do these people have to chose from?
So whilst I do welcome the money that is being injected into the finance market I sadly think that whilst property continues to fall and lenders fail to have the pre 2008 appetite for lending it is more than likely just going to be stockpiled. This will have a domino effect as house prices will continue to fall because of the lack of lending at the right LTV with the right lending criteria which again will make lenders even less willing to lend. I have to say this is quite a quandary and I honestly don't see how it can be stopped until someone has the bravery to just lend knowing the calculated risk it represents I think it is fondly known as taking a punt!.
About the Author:
Mortgage Route gives assistance help and advice on mortgages from qualified mortgage brokers coupled with free mortgage calculators and sourcing tools.
posted by Credit Counseling at
4:35 PM
0 Comments:
Post a Comment
Subscribe to Post Comments [Atom]
<< Home