To get an insight of the 2007/08 “Credit Crunch,” let’s reflect upon what happened, and what lead up to it. If a First Time Buyer in Leeds took out a mortgage to repurchase a home in the 1970s and ’80s. Chances are it was probably through a building society.
It may be hard to believe, but banks didn’t always do mortgages! To see whether or not you qualified for a mortgage, you’d make an appointment with the building society manager. Customers would take out savings accounts with the building society, and then the building society would use that money to lend to other customers. Interest rates would also be higher to borrowers than the rate they were paying to savers so that they could make a profit.
Once the banks started their involvement in mortgage lending, they moved away from the older model. Instead, they would “buy” the money from markets, to accelerate the rate in which they could lend out to customers.
Fast forward to the mid-2000s, and there were plenty of new specialist lenders working in the market. With most of them originating from North America.
Their way of doing things was to sell their book of mortgage customers, allowing them to raise new money and lend again, also known as Securitisation. The investors that bought these books tended to come from larger financial institutions such as pension funds and High Street Banks.
The market started to make a great deal of money, and these new lenders seized an opportunity by introducing more relaxed lending criteria. Poor credit history? Wanting to self-certify? No problem, or so they thought.
These mortgages, of course, began to default. Major banks lost their confidence in each other, due to the uncertainty of how exposed they were in the fast unraveling sub-prime mortgage market.
In no time, the banks’ share prices utterly dropped. Some were bailed out by the UK Government (or more accurately, the taxpayer) to stop them going bust, while many failed to continue.
Over the course of “The Great Recession,” almost 80 different banks, building societies, and lenders across around 20 different countries filed for bankruptcy or were acquired. As a result of this, lending quickly dried up.
Property prices significantly dropped, and everyone lost confidence in the UK economy. It took nearly a decade for the market to recover safely.
Nobody wants this to happen again. Especially the UK Government, so investigations got undertaken to look into where it all went wrong. These studies led to the “Mortgage Market Review of 2014”.
Self-cert mortgages had got banned by then, but the significant change that came was the responsibility of ensuring the mortgages were affordable, now lay in the hands of the lender.
They were digging deeper into customers’ incomes and outgoings with more precise lending criteria. Lenders now were paying more attention to credit commitments, childcare, and other outgoings. So they could ensure customers could consistently afford their mortgage repayments.
No doubt it’s become a lot tougher now to get a mortgage than it used to be. Customers need to organised with paperwork to prove their finances get taken seriously. Many mistakes got made running up to the Credit Crunch. However, the industry has learned a lesson and hopefully minimised the chances of this ever happening again.