Truth Revealed:
What Is The Real Credit Crunch Cause?
Everyone around the
globe has been affected by the 2008 credit crunch, but few completely understand
what exactly caused it to occur. The real cause comes down to dollar signs in
the eyes of many lenders. It may seem that the
credit crunch cause is being blamed on thousands of borrowers who took out loans
they could not afford to pay for in the long term, eventually abandoning the payments
altogether and leaving lenders with trillions of dollars in debt on the books.
While this may be part of the truth, the actual credit crunch cause had more to
do with the lenders who allowed those borrowers to get in over their heads. In
some cases, it is even being alleged that lenders were deceptively leading borrowers
to believe that adjustable rate loans could be refinanced before the payments
got out of control. While this may be true in some circumstances, it is likely
that most lenders were too loose with their lending decisions, but probably did
not actively convince people to sign for loans they knowingly could not afford.
The start of the credit crunch was in the 1990s when lenders
started handing out subprime loans to people who did not have the income or the
credit ratings to guarantee they could pay back the money. Subprime loans are
intended for borrowers with low credit ratings as a means to pay higher interest
rates and higher fees on late payments in exchange for the opportunity to improve
their credit in the future. The original idea was that after a couple years of
paying on a subprime loan the borrower would be able to refinance into a lower
prime rate. The problem is that lenders started loaning
money to more and more risky borrowers until a large percentage of all loans were
subprime. You can probably guess what comes along with risky loans: default of
those loans, of course. The defaults are only part of
the story. Banks only make money if the loans are actually paid off with the interest
they accrue along the way. As the housing market started to decline many people
found that their homes were worth much less than the loans they were paying on.
As more and more people went into default this meant that the banks were stuck
with the debt from the loans unpaid, and the homes they took as collateral were
not worth as much as was owed. The end result is that
even the largest banks ran out of money for future loans. The natural response
in such a situation is to cut off lending except for the cases where there is
a proven track record and the financial means to pay back the money plus interest.
The credit crunch cause therefore was the dollar signs
in the eyes of lenders who realized they could make a nice profit off the initial
fees of making subprime loans. There of course is never a short supply of people
wanting to buy their first home, their first new car, or looking to take out yet
another credit card. Banks allowed their rising profit margins to interfere with
common sense and they extended more risky lines of credit than they could afford
to cover in the long run. Combine those loose lending
practices with an economy heading for recession and you have the real credit crunch
cause.
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