The Credit Crunch
The credit crunch, one of the major events that affected banks across England in 2007, affected how financial institutions go about Lending funds to the general public.
How did the Credit Crunch happen?
To figure out why this happened we have to look at the time leading up to it. Going back to the 70’s and 80’s, if you were after a mortgage you most likely went through your local Building society – Although there was a time when banks didn’t actually do mortgages.
In order to start the process for a mortgage, you would arrange an appointment with the local Building Society Manager to see if you were eligible. The money in which they would lend to you if you qualify would be from the saving accounts of customers at that Branch. In order to keep this running smoothly, they would make it so as the interest rates were higher towards borrowers than the set rate they were paying to savers to keep their profits increasing.
When Banks started bringing in the lending process for mortgages, they discarded the use of this process. To replace this, they started to ‘buy’ the money from certain markets which helped accelerate the rate at which they could lend.
Fast-forward to the mid-2000s and Specialist Lenders had become more widespread, most appearing from the USA. They would lend to customers and then switch these customers to a different large financial institution, such as high street banks, who paid to acquire these customers. This kept the income flowing between these institutions.
How did downfalls occur?
The market flourished and the introduction of these new Lenders meant more relaxed lending criteria, this also led to customers with poor credit histories being approved and allowing them to self-certify their incomes without checks.
When mortgages started gaining defaults, major banks lost confidence in each other because they didn’t know for certain whereabouts they were within the situation that was suddenly occurring at a rapid pace. Suddenly Banks’ share prices were plummeting, and some had to be bailed out by the UK Government, e.g. the UK Taxpayer.
The result of this was a decrease in property prices and a loss of confidence in the British economy. It took many years for the market to recover from this. Investigations also took place as many people including the government did not want an economic relapse.
The Mortgage Market Review of 2014 was the outcome of the Investigations, thus putting into place a ban of Self-cert mortgages and more responsibility towards Lenders to warrant that the mortgages were affordable. Stricter rules meant that customer incomes had to be deeper looked into overviewing both received income and expenditure. There was also a more focused approach into the amount of attention looking at credit commitments, childcare and other outgoings to make sure that affordability was upkept.
In contemporary settings, there is no doubt that it is significantly harder to obtain a mortgage now than it was years ago. Customers have to abide by more strict regulations and have to work harder to prove that they can keep up with the financial responsibilities to which a mortgage entails. There are hopes that because mistakes have already been made once, banks will take more caution with the approach they take in regard to lending to make sure that a situation doesn’t get as critical as it once did.