The credit crunch is in full swing in the USA and laying in its wake are failed financial institutions, record losses by those left standing, ghost towns awash with abandoned homes, and drastic measure implemented by the Federal Reserve to decrease the costs of borrowing and ease the crisis. While there is no doubt that the United States is feeling the effects of the credit crunch, Britain has been living in denial that it will eventually fall victim to the oversupply of loans and mortgages to people with bad credit histories and unreliable incomes.
However the denial may soon fall of deaf ears as property surveyors have begun reporting figures which point towards a major downturn in the real estate market. Surveyors are reporting the worst figures in almost a decade with two-thirds now claiming that house prices are falling rather than rising. This is the most unfavourable consensus since the early 1990s right before the property market in the UK experienced one of its worst ever downturns.
Property prices in the UK have for the past five to ten years experienced a sustained period of steady – and sometimes rapid – growth. Amateur investors and estate agents all over the UK celebrated their newfound wealth predicting that the good times were here to stay, however all was not as it seemed. It is clear now that the property market was boosted by easy credit, much of it in the form of mortgages issued to borrowers with bad credit histories. This was the case in the USA as well as in the UK.
The US has been feeling the adverse effects of the loose lending criteria of their financial institutions for several years now. The UK, up until recently, seemed to dodge the bullet, but now it appears that it was merely a matter of time before the credit crunch made its way across the pond. The first indication was the UK Government’s bail out of Northern Rock after the lender discovered that bad credit mortgages have a downside. The second indication appears to be the unfavourable opinions of the majority of surveyors in the UK about the local property market.
In hindsight it seems obvious – lending mortgages to people with bad credit and almost no ability to keep up with their monthly repayments is not a good idea. No matter how the lenders package the masses of mortgage notes together to sell them off, in the end the financial instruments being traded are secured on properties occupied by people who can’t be trusted to handle any form of credit – least of all home loans.
The seemingly endless supply of credit was always going to stop eventually and the property market was always going to take a turn for the worse because of this. It seems that time is now upon us and lenders only have themselves to blame. There was a time when mortgage applicants required perfect credit records, substantial deposits and steady incomes from employment in order to even be considered for a home loan. During the last five to ten years it seems that even partially employed individuals with bad credit could secure a home loan without showing the lender any documentation beyond a copy of their driver’s license and a utility bill.
The lax lending criteria – attached to many products including bad credit mortgages – has finally taken the turn for the worse that astute analysts have predicted all along. Perhaps it is time to return to the strict lending criteria the industry once had.
