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Recent Articles
Getting a Loan during a Recession – Is it Possible?
The recession’s impact has left so many people wondering if they can dare to dream. Dream of buying a home, a new car, and there is a fear that the recession effects will impact on their own personal lives.
Since the onset of the subprime mortgage crisis, lenders are tightening their lending criteria. These days it is more difficult to get a loan if you do not have a solid financial background you can prove. This will put a lot of legitimate potential borrowers (for example, self-employed people) out of the market, even if they have the ability to repay the loan.
How this Economic Recession Began
To understand how this economic recession started we need to understand the financial loan market.
A subprime mortgage is a loan that is granted to person who would not qualify for a loan under more stringent criteria, e.g. because of a poor credit history. Subprime loans also carry higher interest rates to offset the risk to the lender. These interest rates are often adjustable, with the monthly payments increasing as the interest rates go up.
Because subprime mortgages have a higher risk of default, the lenders limit the percentage of the amount they will lend. Falling interest rates, in recent years, has seen people extend their borrowing power to the limit. Many did this with the intention to refinance their loans before the interest rates rose. But, this time, the bottom dropped out of the housing market and they did not have as much equity in their homes as they planned. This resulted in unprecedented levels of defaults on subprime mortgages that have triggered the current negative economic climate.
What is the Secondary Mortgage Market?
The subprime mortgage crisis flowed on to the secondary mortgage market. This is where banks on sell their loans to free up their liquidity to keep lending money. Banks package up groups of mortgages to sell them to other financial institutions. The theory behind this is that it protects the financial market, if the housing market got into trouble, because it spread the risk among many lending institutions.
Who Purchases Mortgages
Then along come Freddie Mac and Fannie Mae to the rescue. These are examples of mortgage companies that expressly serve the secondary mortgage market. They buy the subprime mortgages from the original lenders and they then sell them on to other banks, such as investment banks. What caused all the trouble was when investment banks, foreign country investors and investors, in general, were scared off by the high rate of defaults and foreclosures on subprime mortgages.
So here we are in 2008, wondering what our financial futures hold. You know what? I think we can all make it if we just keep working hard to get through the tough financial times.
Tags: economic recession, financial background, lending, loan, loans, loans in a recession, secondary mortgage market, subprime mortgages, subprime mortgage crisis