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Mortgage Lending Standards
Banking Crisis – What affect will it have on mortgage lending
Central banks around the world, including the Bank of England, pouring billions into money markets in a frantic attempt to ease the credit crisis. We are all aware that the world is gripped by a "credit crunch" that began in the U.S. and has caused problems across world. As a result of poor lending decisions in the U.S. and excessive defaults, many of the banks that bought the loans in packages – under a process called securitization – now realize that they do not know the quality of the loans they have already taken on, and have become nervous about lending more to each other if they fail to recover their money.
As a result, necessary for the supply of money to go on home loans to individual customers is drying up with the whole credit system at risk to come to a standstill. At present, banks face a £ 30000000000 deficit next year. By pumping money into the system and inviting retail banks to bid on it, the central banks hope it will revitalize the industry and get the system running again. Only time will tell whether this strategy will work. Rachel Lomax, Bank of England's deputy governor, said the bank loan auctions have been "very well received".
However, Nick Stamenkovic, a fixed income strategist at RIA Capital Markets in Edinburgh, is less optimistic. "It's going to take a long time for these problems to go away. These auctions can help to stem the pressure until year end, but the bottom line is until we get a clearer picture of how deep the problems is that banks will hoard cash, "he said.
Chief Economist in the economic and financial analysts Global Insight, Howard Archer, believes the housing market could see a sharp correction next year. This is already happening. According Property website Rightmove, house sellers are cutting prices at the fastest pace in five years. Nationwide, the UK's biggest building society, paid report in November that in the previous month, prices fell at their fastest pace in 12 years. Although this is bad news for sellers is good news for buyers. This is of course that they can get grants.
As to whether the central bank scheme to pump money into the system will work, lacking to be seen. Lenders will be eager to protect their margins, and if lending to each other narrowly the only other place they can raise money from savers. To encourage them to deposit money they have to raise interest rates – with the effect that Mortgages will become increasingly expensive. Cut-price two-year fixed-rate mortgages is apparently a relic of past and mortgage borrowers who can not find cheaper deals elsewhere, might be forced to lenders' more expensive standard variable rates. For all new borrowing, it has a less than perfect credit score, it can become almost impossible for them to borrow at all.
Lenders are tightening terms all the time, with many now requiring a minimum 20% deposit. However, tighter lending criteria could be offset by a lower selling price of the property.
About the Author
Jenny is an author of several articles pertaining to Mortgages. She is known for her expertise on the subject and on other Business and Finance related articles.