Credit Crunch Explained
Just so you know what the terms mean, we’ve published an article (part 2) from the financeblog.
- UK mortgage lenders did not lend so many bad mortgages. Although mortgage lending became more relaxed in the past few years, it still had more controls in place than the US.
- However, it caused very serious problems for Northern Rock. Northern rock had a high % of risky loans, but, also had the highest % of loans financed through reselling in the capital markets. When the subprime crisis hit, Northern Rock could no longer raise enough funds in the usual capital market. It was left with a shortfall and eventually had to make the humiliating step to asking the Bank of England for emergency funds. Because the Bank asked for emergency funds, this caused its customers to worry and start to withdraw savings (even though savings weren’t directly affected)
- As a result of the credit crunch, the UK has seen a change in the mortgage market. Mortgages have become more expensive. Risky mortgage products like 125% mortgages have been removed from the market. (mortgage squeeze)
How Long will the Credit Crunch Last?
The credit crunch could last a long time. This is because:
- House prices are still falling in the US, reducing the value of mortgage loans
- Many homeowners still face rising interest rates, when their introductory periods come to an end
- It can be difficult to regain confidence in the financial markets
- A recession in the US and global downturn could cause a further rise in bad loans