Debt Consolidation Credit Counseling In Phoenix

You may have noticed over the last month many countries have past bills in their governments to inject substantial amounts of cash into their banking system. They have done this on the understanding that all the bad loans also known as toxic debt is weakening the institutions and rendering us unable to borrow money so leaving us all worse off as a result.

But the big question on everyone's lips is, will this have the effect of kick starting the institutions lending again, and if it does, what how will it affect the individual and the public in general. The analysis off this problem will be based on the UK as that is where my financial experience stems. The situation within the UK may bare similarities with that of other countries but I am not in the position to comment on whether the outcomes would be similar or not because I would not be as au fait as to how their markets tend to function.

The general public is under the impression that the credit crunch is due to the banks not having enough money to lend. Logic would then dictate that by giving the banks more money the problem is resolved. Unfortunately this is rather far from the truth. The lack of money to lend is only the tip of the iceberg. Banks have been burned by the bad debt accrued over the last few years and are therefore now much more cautious about lending again. Their careless actions in the past will prove much more difficult to rectify in times to come.

The main result and contributory factor to the current financial predicament is that of house prices, and house prices are not only falling but are set to continue to fall for the foreseeable future. Consequently lenders are finding that they have to tighten all their criteria not least in the area of loan to value LTV, that is the amount of money that is lent based on the value of the property. Most lenders during 2007 lent up to 95% LTV some lent 100% LTV and in some cases they went as high as 125%LTV.

While the market is buoyant most annalists will agree this type of lending is OK. Think about it if you lend on a 100,000 house 125% which results in a loan of 125,000 and the house price rises over the next three years at a rate of 10% per annum, which was not unheard of. Then your LTV in three years time would only be 93% this is alright from a lending point of view and what would be considered an acceptable risk.

However house prices are not rising by 10% per annum in fact they are falling by at least 10% and some people think that these falls will be worse. So with that in mind if you now lend to someone 85,000 on a 100,000 house in three years your loan could be as high as 118% LTV. This as I am sure you will agree unacceptable lending in this climate. This therefore clearly explains why lenders are unwilling to lend over 90% LTV and in some cases 85%.

So what does this mean to the bailout and the future of the market? Well in my opinion, and I may be right or wrong only time will tell, I think that the bailout will have little effect. Yes the lenders are under a commitment to lend at the levels of 2007 during 2009, but if you understand what has been said in my previous paragraphs they cant lend at the high loan to values. Most of the urgent cases for lending are the people coming out of rates that have been arrange in the last five years, these people are going to be pushing the LTVs due to the current house price falls.

You also need to take into account that a lot of people in the last few years have acquired mortgages on a self certification basis. These sort of mortgages are now considered high risk for lenders and so are mostly unavailable, and even if they are available they will be at greatly reduced LTVs, so what options do these people have to chose from?

Don?t get me wrong, I am all for the government trying to give the economy a much needed boost, but I just think that the institutions will be unwilling to take the risk on loans at the 2007 and before levels. They will most probably stockpile for the future. This will mean that house prices will continue to spiral downwards due to the LTV not being at a suitable level and the banks will be even more cautious about the type of loans on offer and also the vetting process. It really is a difficult situation and I think that the only way around it if for one of the institutions to bite the bullet and take a calculated risk with regards to their lending.