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The Credit Cruncher was conceived to help you to keep up to date with credit crunch and recession developments, it provides some helpful credit crunch advice and it addresses personal debt. The Credit Cruncher also seeks to explain how the credit crunch started and shed some light on the worldwide recession. Recently, we have begun to look at how BREXIT will affect the UK economy. Please feel free to leave comments where relevant.

18 Jun 2008

Sub-prime mortgages are to blame?

Like a true politician, the best answer is probably Yes...and No...
Certainly the subprime market has been painted as the villain of the piece, and not without cause, but let's take a look at what happened with the luxury of hindsight:
What is sub prime?
After some years of decent growth in the property market, prices began to stabilise and the threat of dropping house prices was just around the corner. How does a mortgage provider cope with the likelihood of a slow-down? Well the short-term thinkers develop new 'products' and lending policies. Suddenly it is 'cool' to offer 100% mortgages, Heck if they could, some lenders would have tried 110% mortgages if they thought they could have got away with it! (don't tell me, these probably were on offer somewhere!!). 100% mortgages are sustainable where house prices are rising (the lender can get their money back) and where the borrower can meet their payments (as long as you meet the payments, negative equity is not really an issue...).
The subprime market is basically the dodgy end of the market where a more 'conservative' lender would assess the 'risk' as unacceptable. Bad lenders flew into this market in order to get accounts on their books. Bad hedge fund managers bought this debt without really understanding what they were buying. Financial institutions started to fall by the way-side and this time some of the names were big players. This type of debt is frequently bought and sold and some major banks got burned aquiring sub-prime specialists, and the upshot is that there is less capital available to lend, borrowing becomes more difficult and more expensive. In our Western economy, the effects can be widespread as our markets rise on fall simply on 'confidence' rather than actual performance.
So is this bad lending the only factor?
No... this other factors that have added sauce to this latest crunch is the fact that prices are rising fast, especially fuel and the knock-on effects of 'rocketing' oil prices. The effect has been worsened by the combined factors of reasonably static wages, a lack of market confidence and a generally lax attitude towards debt.

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