Loans -
When Banks Take Out Loan for Survival
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In a meeting with bank’s leaders last week, Prime Minister Gordon Brown reiterated his earlier call to lenders to clearly say the amount of bad loans involved in their current travail. Home loans have significantly played a role in dragging major lenders into troubled waters. But what is yet feared is that the crisis is far worse than it is speculated. Mr Brown was, therefore, right in insisting on knowing the whole truth.
Looking back at credit crisis, particularly the role played by sub-prime mortgage loans in the US, it’s clear that banks and building societies need a serious and urgent support from the government.
Last year, Northern Rock became the first victim of credit crunch in the UK, until government intervened to save it from total collapse. In the months that followed, the situation continued to get worse with funds drying up and lenders finding it very hard to cope with demands from borrowers. The only logical choice was for banks and building societies to tighten up lending criteria. This was to also have a direct impact on borrowers, who were often turned away by borrowers or made to pay the higher rates interests on borrowing.
The Bank of England, which had in the past few months intervened, was further urged to wade in. In recent weeks speculations became very rife that something was about to be done. In particular, Chancellor Alistair Darling advised banks against hiking their rates any further, while promising them government support. What then was not clear was how this support would come.
While holding talks with banks’ chief last week, the prime minister’s attention was once again drawn to the need for introducing the much-needed liquidity into the system. This would to allow the central bank to swap securities backed by UK mortgages for £50 billion of government bonds. In return the banks are expected to offer loans to first-time buyers and people struggling to find new mortgage offers – those whose fixed-rate mortgages are coming to an end.
The scheme, which is the biggest attempt by the British monetary authorities to provide liquidity to the country’s banking system, will also encourage banks to lend to each other as well as homeowners. Recently, most lenders were reluctant to lend to each other.
The bonds would be rolled over for three years although it would have a maturity of about one year. It would also help in easing the banks’ demands for longer term loans.
As this plan is being rolled out, it also emerged that some banks have already mapped out plans to further tighten the noose on borrowers, with stricter lending criteria and further withdrawal of products.
Mortgage products have almost totally dried up since last summer, a study by MoneyFacts suggests. The clampdown affects not just first-time buyers but also property owners.
For those aiming to borrow up to the sum of £500,000 or above, the UK’s second largest lender, Abbey, is even making it harder. It is feared that people hoping to borrow more than half a million may have to provide a deposit of at least 15 per cent and loans over 1 million could attract a 25 per cent deposit.
While the intent of the government in providing the £50 billion liquidity is to ease the stress faced by the lenders, which they in turn heap on borrowers, it makes little sense that the borrowers are further hit by the new changes.
But some analysts are of the opinion that banks like Abbey are only trying to protect themselves against negative equity. This is further understood if we consider how house prices are continuing to crash. Thus, banks would want to deal with only customers who have cushions to fall back on, in case it gets worse.
For those who expect things to automatically change for the better, this development is a bit disappointing.
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