With the credit crunch wreaking havoc on the global economy certain governments throughout the world have stepped in with bail out plans involving the injection of money into their individual banking systems. The reason behind this is to stave off the bad or `toxic? debt which they see as crippling to their countries' economies due to unstable institutions and negligible public borrowing.
The burning question now is whether or not this cash injection will have the desired effect so that we are able to borrow money confidently again. At present I am only able to comment on the effect these changes will have on the general public in the United Kingdom, as I am unaware of how other global markets work within their countries, and therefore am unqualified to comment. There may be similarities in how the markets work, but it is best to take my comments here as a rough guide only if outside the UK.
Now the general consensus would be that due to the credit crunch the various financial institutions involved in the lending of money are not at liberty to do so, through a lack of it. So it would then follow on that the way to solve the problem is to supply them with the necessary means, i.e. more money. But this approach does not begin to scratch the surface with regards to the underlying problem. The reality is that the banks have been badly hit by the credit crunch and so are quite unwilling to continue on with lending as if nothing had happened.
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..
The problem now is that rather than rising by 10% per annum the housing prices are in fact dropping by that much, and they are set to drop even more. If you consider that drop, if a lender was to give 85,000 on a 100,000 property which continued to drop in value, in 3 years the LTV could rise to 118%, which in these turbulent times is simply not acceptable. This is why lenders are now slow to lend out quantities much over 85%.
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.
In addition you will also have to factor in the situation that a lot of people over the last five years have obtained self certification mortgages. Most of these mortgages are now not available due to the fact that they represent too much of a risk for the lenders, and if they are available they will be at much reduced LTVs, so what are these people going to do?
Don?t get me wrong, I am all for the government trying to give the economy a much needed boost, but I just think that the institutions will be unwilling to take the risk on loans at the 2007 and before levels. They will most probably stockpile for the future. This will mean that house prices will continue to spiral downwards due to the LTV not being at a suitable level and the banks will be even more cautious about the type of loans on offer and also the vetting process. It really is a difficult situation and I think that the only way around it if for one of the institutions to bite the bullet and take a calculated risk with regards to their lending. - 15224
The burning question now is whether or not this cash injection will have the desired effect so that we are able to borrow money confidently again. At present I am only able to comment on the effect these changes will have on the general public in the United Kingdom, as I am unaware of how other global markets work within their countries, and therefore am unqualified to comment. There may be similarities in how the markets work, but it is best to take my comments here as a rough guide only if outside the UK.
Now the general consensus would be that due to the credit crunch the various financial institutions involved in the lending of money are not at liberty to do so, through a lack of it. So it would then follow on that the way to solve the problem is to supply them with the necessary means, i.e. more money. But this approach does not begin to scratch the surface with regards to the underlying problem. The reality is that the banks have been badly hit by the credit crunch and so are quite unwilling to continue on with lending as if nothing had happened.
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..
The problem now is that rather than rising by 10% per annum the housing prices are in fact dropping by that much, and they are set to drop even more. If you consider that drop, if a lender was to give 85,000 on a 100,000 property which continued to drop in value, in 3 years the LTV could rise to 118%, which in these turbulent times is simply not acceptable. This is why lenders are now slow to lend out quantities much over 85%.
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.
In addition you will also have to factor in the situation that a lot of people over the last five years have obtained self certification mortgages. Most of these mortgages are now not available due to the fact that they represent too much of a risk for the lenders, and if they are available they will be at much reduced LTVs, so what are these people going to do?
Don?t get me wrong, I am all for the government trying to give the economy a much needed boost, but I just think that the institutions will be unwilling to take the risk on loans at the 2007 and before levels. They will most probably stockpile for the future. This will mean that house prices will continue to spiral downwards due to the LTV not being at a suitable level and the banks will be even more cautious about the type of loans on offer and also the vetting process. It really is a difficult situation and I think that the only way around it if for one of the institutions to bite the bullet and take a calculated risk with regards to their lending. - 15224
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