The Credit Crunch
2007, a year in which one of the most critical economic situations had occurred, affecting many financial institutions and changing the way most High street banks lend – the credit crunch.
How did the Credit Crunch happen?
Many people are unaware as to why this happened so gain a deeper understanding of this, we would have to rewind the clock and look back into the 70s and 80s where if you wanted a mortgage it would most likely be through your local building society, as there was a time where banks didn’t provide mortgages.
To start the process of a Mortgage years ago you would have to arrange an appointment with your local Building Society Manager who would check to see if you could be approved. The money that would be lent to you would be obtained from savings accounts of the branches’ existing customers. In order for this to happen, interest rates for borrowers would be higher than the interest rates that were being paid to savers to maintain the increase in profits.
When banks had started carrying out the lending process they discarded this model and replaced it by ‘buying’ the money from the market as a faster alternative, helping them accelerate the rate at which they were able to lend.
Skipping ahead to the mid-200’s, Specialist Lenders had now become more integrated within the British property market. They had their own process of lending to customers then selling them onto different financial institutions, including high street banks. This kept income rolling between these institutions.
How did downfalls occur?
The market had become more fruitful and the new Lenders had meant lending criteria had become more relaxed, meaning customers with poor credit histories were able to be approved and meant they were able to self-certify their incomes without checks.
When defaults started building up on mortgages this had a downfall affect. Major banks lost confidence with each other due to not knowing each other’s place in the market. From this, bank share prices started plummeting leading to the UK Government and UK taxpayers having to bail them out.
As a result of this, property prices dropped and confidence was lost in the British economy. It took many years to recover the damage done to the market and investigations were carried out to reassure the general public and the government and ensure this didn’t happen again.
The reassurance for this came from the Mortgage Market Review in 2014. The outcomes that came from this was a ban on self-cert mortgages and a bigger responsibility of Lenders to make sure that affordability was evidenced. This meant that stricter rules were put into place in relation to customer incomes – both income and expenditures. A more focused approached meant Lenders took more time to look further into a clients credit commitments, childcare and other outgoings to overview affordability.
Nowadays, there’s no doubt that it’s harder to obtain a mortgage compared to years ago due to the stricter regulations in which customers have to abide by, and evidence they have to present. It is because of the credit crunch scenario, that banks are taking more caution to make sure that a situation like this doesn’t happen again.