Current “credit tightening”…how did we get here?
Due to the volatility in the market and the recent attention the mortgage industry has tendered, we would like to help explain in a summed up version, of how we arrived at the current market.
In the late 90’s, the dot com bubble burst which left many investors looking for other investment opportunities. Investors began buying properties and flipping them after only a few months and seeing some nice returns.
Then 9/11 came and the market took a nose dive. The Fed needed to step in, and it did. They staved off a recession by lowering key rates. Ultimately the Fed Funds rate bottomed out at 1%. This lead to the lowest mortgage rates in 40+ years. With rates low and home values rising, the mortgage industry exploded.
Borrowing money was so cheap that lenders wanted their money in other vehicles, preferably not minimal interest earning bank accounts. The risk of inflation grew. As America recovered from 9/11 and the economy seemed more secure, the Fed began to raise rates.
Banks were anxious to maintain their existing lending volume, and a pricing war between the lending institutions ensued for the next 2+ years. By the end of 2006 the Fed had raised rates 17 times. As the cost for banks to borrow money increased, consumer rates remained mostly stagnant as the pricing war continued. As quarterly earnings continued to yield losses for the major banks, rates finally began to rise, as these lending institutions focused on profitability as opposed to volume. Not being able to keep running at a loss, the banks then turned to easing their credit requirements as a means to increase lending volume.
Stated Income loans to 100% of a home’s value, “no doc” loans, and 100% financing for borrowers with 580 credit scores are all aggresive loans that were part of this “ease” in qualifying borrowers for a mortgage. Foreclosures have increased substantially and 118 mortgage lenders and counting have gone out of business. Two European banks have closed their doors and at least 11 hedge funds have ceased lending operations. The bottom line right now is that money is available to borrowers, but the guidelines to qualify have tightened.
We want to assure you that we are here for the long term. Choice Finance® is a well managed and financially sound institution. We still have 100% financing programs available, and very low rates. We believe it is our responsibility to keep you informed of the market conditions and we will do our best to continue to do so.
Tags: credit crunch, subprime