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How has it happened?
One of the main indicators is that Banks, Building societies and other financial institutions had relaxed their lending criteria. They were issuing mortgages to those who were not in a realistic position to maintain the levels of repayment. This has resulted in a number of people defaulting on their mortgage payments.
According to many reports, the problem would appear to have originated in the US, where sales tricks were used to entice people into borrowing money. The lure of cheap rates, low monthly payments and the chance to own their own home, without the full facts explained, meant that people were left shell shocked when the discounts ended and the rates rose sharply. Consequently, the number of repossessions increased dramatically, affecting the value of property.
Lenders soon picked up on the fact that this had a huge effect on their inter-bank exchanges and began to stop lending money to one another.
To use Northern Rock as an example, they relied on borrowing money from other Banks. When this stopped happening, they found themselves without sufficient back up to support their swollen mortgage portfolio. In the US, the seventh largest investment bank, Bear Sterns went bust in a similar turn of fortune. Northern Rock were aided by the Bank of England but Bear Sterns has to be ‘rescued’ by another bank.
What happens next?
Whilst house prices will undoubtedly fall somewhat and SOME people may find themselves in a negative equity situation, it important not to lose sight of the real facts. Negative Equity will only affect you if you are thinking of moving home.
The days of lending to all comers with a flippant attitude to income, credit status, age and loan to value has certainly ground to a halt. Lenders need to regain their trust in one another and liquidity should soon follow. Until then, borrowing will remain tight and borrowers must ensure they maintain ALL of their credit commitments to ensure they can take advantage of new products as and when they become available.