Free Articles at Neutron Marketing Article Publishing and Distribution » Finance » The Credit Crunch What Does It Mean To You.
Previous Article - Credit Understanding
Next Article - Your Credit Report Score Has Errors - Fix It Or Get Over It

View PDF | Print View | Html Version
by: ChrisClare
Total views: 4
Word Count: 691

The aim of this article is to define the credit crunch and explain how it may have an affect on you as a borrower. Although it is compiled with the UK market in mind, due to similarities between the different countries within the European and world markets, the effect it may have on the individuals within these markets will likewise be similar.

Let's start by explaining what the credit crunch actually is. The term, and the situation as we know it, began in the US, and was caused by two primary reasons. Firstly, the way money was being lent and also the way in which the lenders were procuring the money which they were lending have caused the problem.

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.

This whole situation has affected the UK in so much as some of our major lenders use securitised lending as their main source of business and even though in the UK we are very much more conservative in our lending practises the international money markets still don't want to lend the amounts they once use to.

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.

About the Author

Mortgage Advice from qualified Independent Mortgage Advisers help information and free to use mortgage calculators please visit Mortgage Route

---

Rating: Not yet rated

--Choose-- 0 1 2 3 4 5

No comments posted.

Add Comment

Enter the code shown