Pros and Cons of the Mortgage Credit Crisis in the UK
We know from experience that when a glass is half-empty of water (or our favorite beverage,) it is also half-full. In “Hamlet,” one of Shakespeare’s masterpieces,” the protagonist reveals this truth by stating, “…there is nothing either good or bad, but thinking makes it so.” Indeed, while certain crises may seem devastating or even insurmountable, our perception of the situation is vital. If our computer crashes when we need to use it, we should focus our energies on getting it fixed or securing a new one.
Similarly, the most recent mortgage credit crisis in the UK has had a huge impact on the financial market in the UK. It has particularly resulted in numerous headaches for those who are seeking the first mortgages. However, this is not the time to panic. It is important that we calmly analyze the situation, and then determine how to best cope with it. By approaching the crisis in this manner, it may even be possible to find a silver lining in the cloud.
Fewer lenders and lending
As the UK mortgage crisis continues, mortgage lenders continue to respond to it. The number of major mortgage lenders has slid over two-thirds, during the past year. Furthermore, new mortgage approvals have plummeted over 50% during that same timeframe.
In fact, major players in the industry, such as First Direct, Cooperative Bank, and Halifax have either altered their mortgage products; and in many cases, they have completely withdrawn (for now, temporarily) particular mortgage products. The reasons given for these changes in product lineups have varied, with a major one being a boom in demand.
Less loose lending
From an optimist’s perspective, the good news is that mortgage companies seem to be lending in a more conscientious manner. During the recent past, homebuyers could take out low-rate mortgages in their sleep. This makes perfect sense, as economies tend to move in cycles. Thus, homebuyers will now be required to make larger deposits when taking out a mortgage, and take out mortgages with multiples of annual salaries that are lower than during the recent housing boom.
The nuts and bolts of the problem
Let us dig deeper about how the credit crisis has impacted the mortgage sector. In a nutshell, the mortgage crisis related to liquidity. Mortgage lenders are lending less money because the banks are loaning each other less money. While the result of the crisis involves demand, the cause involves the supply of capital. In addition, the current mortgage crisis is not exclusive to the mortgage sector. In general, financial institutions have deviated from more generous lending during roughly the past decade. Thus, it is also becoming more challenging to secure personal loans and even credit cards.
What rent wrong? Most of us understand that when taking out a mortgage, the house serves as collateral. Therefore, when we cannot make mortgage payments, the bank can recuperate its losses by repossessing the house and reselling it. This involves the basics of lending. However, the problem involved not only lenders and borrowers, but also lenders and other lenders.
In the case of the US sub-prime mortgage crisis, the problem was three-fold. First, lenders issued mortgages to people with bad credit because they had: A) a steady income, B) an ample deposit, and C) selected a house that the seller could sell. Lenders used all sorts of gimmicks to entice potential first-time homebuyers into doing as such and taking out a mortgage. Mortgage lenders took many of these poor chaps to the cleaners, resulting in a huge number of defaulted loans and foreclosures on properties.
The second problem in the mortgage credit crisis was the devaluing of properties, through repossessions. The huge number of repossessions greatly devalued the properties. This, in turn, devalued the loans that homebuyers took out on the properties.
A third problem in the mortgage crisis worth considering when comparing the pessimists vs optimist views on the financial crisis involves inter-banking relationships. Bank X might decide to buy some of the debt that Bank Y incurred, through the doling of mortgages. After making their assessments of the properties’ value, Bank X proceeds with buying up some of Bank Y’s debt. However, they might later come to the realisation that the properties’ values were lower than they had protected. In some cases, credit ratings agencies had valued certain mortgage products much higher than they actually were.
In all of the recent news and analyses regarding the mortgage crisis, you have probably heard the term “moral hazard” more than once. In theory, regulators should not bail out banks that have financial difficulties due to their own irresponsible lending. In theory, this would eliminate banks that have doled out mortgages irresponsibly. However, this did not happen.
The good news
In analyzing the current situation and how the crisis is affecting specific groups, is the news all bad? In terms of both mortgage lenders and borrowers acting more responsibly, that is not the case. Of course, borrowers enjoyed the ability to make smaller deposits and take out mortgages worth 4-5 times their yearly salaries. However, it is important to remember that even when you are capable of borrowing more, it is borrowing nonetheless. Though it may seem somewhat obvious, the more you borrow, the more you must pay back. Conversely, the larger deposit you are required to make and the less you can borrow, the easier it will be to pay off your loan.
Besides this silver lining in the cloud of the mortgage crisis, here are some other reasons to have a positive outlook on the current situation:
The organisation of regulators is much better than it was in the past.
The scarcity of land in the UK should help properties to retain their values.
The immigration wave of Eastern Europeans into the UK will remain sustained, in turn keeping the demand for housing high.
The amount of credit available will not completely dry up. While it has become more difficult to secure credit, the supply is still quite high.
The UK economy as a whole will survive the crisis, including the effects of the US sub prime mortgage crisis.
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