Why are we in a mess after all this money has gone to the banks?

The situation with the banking and lending institutions may throw some people into confusion, which I find is totally understandable. The banking system has had many billions poured into it, yet it doesn?t appear they want to lend any of it to enable people to purchase or develop property. It even appears that lending to people for high street spending has in many cases come to an abrupt end.

Furthermore, we are seeing unprecedented reductions in the interest rate those of which we have never seen before, all in the attempt to persuade lenders to lend and borrowers to borrow. Nevertheless, all these attempts to motivate the consumer to spend their money has been a non starter and this can only beg the question; ?why ??

The answer comes as no huge surprise really. Due to the fact that lending establishments are currently unsure of their assets leading them to be very unsure of their liabilities has caused them to plunge into somewhat of a crisis.

For the most part this has been caused through their indecisiveness as to which will be a sound loan and which will not. In other words, they are trying to avoid liability to their businesses caused through a bad lending, with the obvious consequence that they are reluctant to lend for fear of what will happen.

One assumption people can make is that that is the only reason banks are reluctant to lend is due to the fact they are unsure of their position, but that would be slightly off the mark as it is not the full story. It is more likely they have had a rude awakening from the way they administered overindulgent lending over the past few years which was further compounded by lending on a self certification basis to borrowers; lending well in excess of 95%.

This essentially means that their lending book is full of very high risk business. So having realised this they are not predisposed to lending any more in this way. However the problem is they have lent so much money in this way to so many people it is quite difficult to find a client with a low loan to value mortgage and someone who is happy to provide full proof of income.

The big question then is if the interest rates are encouragingly low and there is plenty of money in the banks for them to lend to clients, surely we are all rushing out to spend? I think not and that is purely down to their difficulty in essentially finding someone happy to lend 90% to 95% or 80% on a self cert basis.

In conclusion, my personal opinion is that the mortgage market, if it returns at all, could well take some years before we see a any changes. These changes may be in the way we mortgage our properties leaving behind high loan to values and self certification. Indeed, the ease with which these mortgages have been recently been churned out has resulted in the inflation of the property market over the last few years. It?s arguably a good reason why many of these mortgages should never have been obtained. Our future prospects could be about biding our time till incomes and deposits reach levels compatible with house prices or a more a chilling thought is to simply wait till property prices decrease.

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The mortgage market needs something but is it just money?

Over the last four weeks you may be aware that many governments have been pumping money into their failing banking systems in an attempt to salvage the mortgage markets. The reason for this is that all the bad debt, known as toxic debt, is having a detrimental effect on the financial institutions and is making us all worse off.

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.

To most people the credit crunch is all about banks not having the money to lend. So it is fair to assume that if you give the banks the money that will solve the problem. Sorry this is not the case in fact this is actually far from the case. Banks not having the money to lend is only one aspect of the problem. Most banks are "once bitten twice shy" to coin a phrase. They have lent badly and are now paying the price, it is this issue that will be with us way beyond any bailout plan has been agreed and distributed.

One of the principal areas to focus on when assessing the reasons for our present financial crisis is the area of house prices. As everyone knows they have taken a big tumble and there would seem to be no respite in the immediate future. Lenders are now facing a situation in which they have to implement more rigorous procedures and one of the targets is that of loan to value, or LTV, which is the amount that they are willing to loan dependent on the value of the property. They were lending from 95%LTV up to a staggering 125%LTV.

Most experts will agree that as long as the market is buoyant, this lending is alright. If you take into account that the market was rising at a rate of 10%, lending 125% on a property of 100,000 means you are lending 125,000, but with that 10% rate of increase in value over just 3 years your LTV has already dropped to around 93%. In a buoyant market, this sort of lending would be considered a calculated profitable risk and was therefore given the o.k..

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 with regards to the money bailouts, what does this mean for our financial future? In my professional opinion I believe that there will be little overall effect, although with any luck time will prove me wrong. Although lenders are now obliged to lend in 2009 at the rates of 2007, as you will see from the first part of this article they won't be able to lend at the high LTV rates of 2007. The people who are now desperate to borrow are those coming out of rates already arranged in the past 5 years, and these borrowers are going to push the LTV to its limit because of the drop in house prices.

In addition you will also have to factor in the situation that a lot of people over the last five years have obtained self certification mortgages. Most of these mortgages are now not available due to the fact that they represent too much of a risk for the lenders, and if they are available they will be at much reduced LTVs, so what are these people going to do?

In conclusion, although the cash injections can only be welcomed as a step in the right direction, I fear that there will be little knock on effect whilst housing prices continue to plummet and lenders fail to meet the level of lending that was rife before 2008. It seems more likely that the money will be stored up for the future. This will unfortunately create a catch-22 situation where the prices continue to fall because of the low LTVs and the tight lending criteria, in turn making the lenders more nervous about lending. It seems to me that the only way out will be for someone to bite the bullet and take the risks again at lending, even taking into account the possible risks involved.

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