Loans

In our last post, we began to explain the effect of the credit crunch on the sub-prime lending sector, its knock-on effect to fast cash loans and the future of the money markets. The second and final part to this text continues now:

As borrowers began to default on loans payments, and as interest payments rose, re-financing for homes began to crunch resulting in deflationary price pressure on houses. This has led to banks being unable to recoup the full value of the fast cash loans.

Traditionally, the risk of default would stay with the bank that approved the loans in the first place, however the development of financial securitization instruments has lead to these cash loans being traded globally. The primary securitization instrument used to recoat these debt instruments is known as a CDO, or Compulsory Debt Obligation. These are highly complex bundles of debts that are traded between banks on a global scale. These CDO’s contained a lot of the mortgages that began to be defaulted on this year. This is why the effect of the credit crunch has been felt so strongly worldwide. The fact that banks could approve cash loans of doubtful quality, and then sell them to other banks is perhaps one of the chief reasons for the irresponsible lending in the first place. If the risk of credit default had to stay with the lender, they would not have been so keen to lend irresponsibly. The fact is the assets these secured home loans were constructed on represented a false economy.

The impact of the credit squeeze is not yet fully known or realized. Banks have first to identify where the mortgages originate from that are encased in these bundles and then yet to see if default is likely. The accounting technique of mark to market will be vital at this time to ensure a steady release of information as and when it comes out.

Banks in this country are most certainly less happy to issue loans at this stage. Clear indications of this include the dramatic fall in the number of new secured cash loan approvals this month compared to this time last year.

This is our first blog post on blog.co.uk and we hope you find it useful!Today and in a number of other successive posts, we hope to convey the likely impact the credit squeeze will have on the adoption rates for fast cash loans, and the current and expected future liquidity of the world's capital markets.

When governments won’t even lend to each other, there’s no way they will consider lending to you! This was an emphatic statement made by one of my trader friends while we were discussing fast cash home loans and fast cash personal loans at the time the credit squeeze surfaced into the public domain earlier this year.

At the time he made this remark, the public were not particularly aware of the crisis in the US sub-prime mortgage sector and certainly had no idea how this debt-based monetary recession could spread across borders. The well-known but not well-loved saying, ‘when America sneezes, everyone else catches a cold’, seemed to be the silly sentiment hurled round the trading floor as some kind of holistic explanation to what was going on. This later revealed itself to be a wholly incomplete explanation for what had happenned and what was likely to come about in the upcoming year or so.

To understand what had happenned to the economics of global capital markets and the likely impact this would have on fast cash loans,it is a great idea to begin by examining the US sub prime lending sector. A sub prime cheap cash loan is a loan made to an individual who would not qualify for the same loan at prevailing equilibrium market interest rates. This person may likely have county court judgements, a bad credit history, or simply be in arrears for existing credit card debts. Nevertheless, there is still money to be made out of these individuals as long as the interest rate charged is high enough. The high interest rate is compensation for the bank or lending institution accepting a higher level of risk of payment/credit default on the fast cash loan. In the UK, I’m sure everyone is aware of the huge financial sector dedicated to approving loans to individuals who cannot afford to repay them!

As of March 2007, the US sub-prime mortgage sector was estimated at $1.3 trillion dollars in value. As of October this year, 16% of all these secured homeowner loans were 90 days into default or in foreclosure proceedings, around 200% more than in 2005. The reasons for such a disaster of financial planning are not fully understood but the most popular explanation is as such. The Federal reserve had to steadily increase interest rates this year to curb inflationary pressures. This had a knock on effect such that people who took secured loans on a variable interest rate basis began to find it harder to make their repayments. Under responsible lending, this should not happen so easily, as candidates approved for loans will only be allowed to borrow amounts they can comfortably afford to repay. The problem in the US sub-prime sector was that lenders were pressurizing people into artificially inflating their salaries and assets to allow a greater loan to be processed. This by no means shifts responsibility away from the cash loans applicants, however the banks should be expected to operate ethically and have a greater understanding of the implications of such lending.

To keep this blog brief and manageable for you readers, I will be posting the concluding half in my next posting in 2 days.