The Rise of the Credit Crunch

I get a lot of questions as to why it is so hard to get a loan. So, here is the brief background on the situation from a global perspective.

The term “credit crunch” might have been a foreign concept a year ago, but that is no longer the case with today’s financial market crisis. A credit crunch is also known as a credit squeeze, finance crunch, or credit crisis. In a credit crunch, the general availability of loans is reduced and the conditions to acquire a loan from the banks are tightened.

The credit crunch stemmed from U.S. mortgage companies giving loans to individuals with poor credit records. The lending conditions were very lax, and just about anyone could qualify for a loan. People took advantage of this, borrowed cheap money and bought properties.

This created a huge debt bubble and these debts were sold to financial institutions around the world. In turn, these financial institutions sold these debts to different pension and hedge funds. These institutions eventually suffered great losses. The credit crunch is now on a global scale.

Today, banks are now reluctant to lend money to individuals or to each other. Furthermore, investors are becoming suspicious of the stability of the financial sector. This means a decrease in mortgage-related investments.

The crisis affects the consumers the most. Banks and other financial institutions are reluctant to lend simply because they are not sure of the health of the financial sector. Mortgage companies even find it difficult to lend to borrowers with good credit histories. They become nervous with the simple act of lending. They become choosy. For those who are fortunate enough to qualify in their rigid conditions, they charge higher rates of interest to cover their risk.

The credit crunch brought about many home foreclosures. With a large number of homes in the market, prices are dropping. Because of the soaring borrowing rates, good value mortgages are hard to come by.

The struggle in the mortgage market caused confidence to fall. As a result, stock markets have dropped dramatically.

There is no doubt that the credit crunch has caused the decline in the housing market and, ultimately, the global economy. The crisis, however, is far from over.