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| The mortgage market needs somehting but is it just money? |
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| Written by Chris Clare |
| Monday, 01 December 2008 11:40 |
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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. To most people the credit crunch is all about banks not having the money to lend. So it is fair to assume that if you give the banks the money that will solve the problem. Sorry this is not the case in fact this is actually far from the case. Banks not having the money to lend is only one aspect of the problem. Most banks are "once bitten twice shy" to coin a phrase. They have lent badly and are now paying the price, it is this issue that will be with us way beyond any bailout plan has been agreed and distributed. 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 this mean to the bailout and the future of the market? Well in my opinion, and I may be right or wrong only time will tell, I think that the bailout will have little effect. Yes the lenders are under a commitment to lend at the levels of 2007 during 2009, but if you understand what has been said in my previous paragraphs they cant lend at the high loan to values. Most of the urgent cases for lending are the people coming out of rates that have been arrange in the last five years, these people are going to be pushing the LTVs due to the current house price falls. 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? 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: Advice on mortgages from qualified Independent Mortgage Advisors guidance information and no obligation mortgage calculators come to Mortgage Route Grab a totally unique version of this article from the Uber Article Directory Kindly provided by LJ-Marketing.dk You are welcome to use this article on your own website, if you include the link just before this text. |
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