Credit crunch and loan rates

During January 2007 I had invested in the stocks of New Century Finance Corporation, the second largest home mortgage company in USA with 7,200 employees. By March 2007 the stock priced at $40 reduced to few cents and this company was de-listed on NYSE. This was followed by the stock fall of Countrywide Financial late in 2007 and Citibank in early 2008 who were other big players in the global home loan mortgage market. Yes, this was the bubble burst for the home loan lending which was considered the safest form of investment.

How have I been affected by the credit crunch? When did I first experience the credit crunch? During 2009 I was turned down for a car loan even with a credit score of 800 which is considered excellent in the USA. Car dealerships are looking for customers desperately. There can be only one reason to turn down car loan to an individual like me with exceptionally high credibility. That lending institutions simply do not have money to lend.

Where did all the money vanish? Ten trillion dollars have eroded from the stock market in USA in last one year.

It is simple that lending institutions and not the private individual investor are the biggest players in the stock market. If stock market crashes and stocks loose value than the net worth of the lending institutions gets eroded. As soon as the net worth of a lending institution declines the depositors in these lending institutions want their money shifted to a safer place. But there is no safe place left. On one end the lending institutions do not have funds and on the other end lending institutions are no longer willing to accept deposits.

Earlier you could get a lending institution to pay up to 5% APR on a Certificate of Deposit. Now all they are offering is 2% APR on your deposit. The lending institutions have simply stopped doing business and are trying to clean their house till economy once again stabilizes.

The government has loaned out huge bail out money to lending institutions but lending institutions instead of lending money have used the money to pay back their depositors and the business cycle has just not re-started. Once again lending institutions have had easy access to the government bail out money.

Lending institutions for the sake of protecting their identity are advertising low lending interest rates but are not lending out money to even very high credit worthy individuals for two reasons. Everyone’s net worth has eroded and high credit score of today is no longer a safe indicator of the future repayment capability. Secondly lending institutions have no money to service even their depositors so how can they lend out!

Is it the lack of confidence and withdrawal of deposits by these investors that has caused liquidity crises and not the default by borowers? The blame is being passed on the poor borrower who is in fact a valuable customer. Does the credit crunch start because borrowers are not able to repay back or is it because of the poor management on part of the lending institutions? Are too many borrowers hiding behind the bankruptcy protection law on the excuse of not having to pay back troubled lending institutions?

Surprisingly there is lot of debate about borrowers defaulting on home loans but there is no news about consumers defaulting on credit card loans which bears an exceptionally high APR and is totally unsecured loan.

Borrowers over invested in their houses as housing seem to be the safest place to invest in till year 2007. The USA treasury has reacted by lowering the treasury borrowing rates to zero percent and pumping in a trillion dollar in the USA economy. But the financial market is still at a stand still.

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