Tag Archives: mortgage loans

Credit Crunch? What Credit Crunch? Where?

Whether it’s in the U.S. or here in Canada, I keep hearing about that “credit crunch.”

I understand it, but I can’t personally find it, and you won’t, either. Not as an individual who has decent credit, with a credit score above 700 and the income to justify making the payment.

In fact, all the talk in the U.S. recently was that the lowering of interest rates to near zero was fueling a huge boom in re-mortgaging. Well, those two stories of a credit crunch and all that refinancing don’t jive. And if I had the resources, I’d gladly put up a reward for anyone who can document being turned down because of a credit crunch. It won’t happen.
Find me a lender who’s got the sign out: Not lending today.

I tried to find it myself. I applied for three car loans and three lines of credit. No, I wasn’t getting them – neither you, nor me need more debt. But I was approved every single time! I’m pretty typical middle class and have a credit score over 720. All the approvals were a no-brainer and took less than five minutes each time.

Challenges for business credit issues are different and do exist. But you and I don’t borrow 50 million or a half a billion dollars. It’s why the government is getting the Export Development, Farm Credit and Business Development corporations involved, and helping them.

Lots of debt also gets sold as asset backed securities. That’s the balloon that blew up in the US housing market. It’s about a $50 billion market in Canada and that’s definitely slowed down. No investors really want to own pieces of these securities right now.

As a result, lenders have to keep their loans or credit card balances on their own books, instead of re-selling them. That is the reason rates haven’t moved down much for fixed mortgages and why credit cards are actually going up. It’s an issue of supply and demand.

If we call it business credit crunch, I’m OK with that. But for you and me – for us individuals, there’s isn’t a crunch, shortfall or lack of money. There’s just a new reality that we need good credit and the money to pay the payment. If lending based on good credit and income hadn’t been temporarily abandoned for a few years we wouldn’t have 90% of the mess we do now!

What The Heck Happened On Wall Street This Week?

In the months to come it’s likely this past Monday will be called Black Monday on Wall Street. Where do I start with the big three stories of the day.

But first things first: I wish I had five more minutes to give you a brief history of how we got here, because it affects us Canadians in huge numbers of ways.

Suffice it to say that in Canada, banks hold mortgages on their own books and keep them in-house. In the U.S. they’re packaged and sold in blocks called Collateralized Debt Obligations, or CDOs. They’re all pieces of thousands of mortgages, good stuff, bad loans, subprime and kinky ones all put through a blender and packed nice and neat. Everybody wanted them and nobody could get enough on their books for years.

The huge investment firms were making billions in fees gathering them, packaging them and re-selling these CDOs. It turns out that they started to fall in love with the product they were selling. First, they put a ton into their own accounts, because it was a great return. When things slowly started going sour and they didn’t want to admit it and to keep making the market think everything was just fine, they got stuck with billons more they couldn’t sell.

Now back to Monday: First was the huge and well established investment firm Lehman Brothers filing for bankruptcy. They were done in, or finally dragged under, by over $60 billion of bad mortgage loans on their portfolio. And, gee – their CEO got $22 million in pay just this past year. Nice money for guiding his company into bankruptcy…

Then came the announced sale of Merrill Lynch to Bank of America. Same story in a way, since Bank of America is buying the firm in an all-stock deal. That’s kind of like me buying your house for no cash, but only paying off your credit card bills.

Lastly was the insurance giant AIG filing for re-organization. It’s not that the insurance business is bad. It’s just that AIG invested their clients’ premiums in mortgage loan portfolios, instead of GICs, because they were getting a better return. Lesson number 780 for all of us: If you want a higher return you have to take a higher risk!

And a month ago, we were told that the worst was behind us. Yea, right. Banks and investment firms are the oxygen of the economy and this isn’t helping.

Added to the Monday list is the government takeover of Fannie Mae and Freddie Mac last week who hold over $5 TRILLION of mortgage loans. There isn’t really a Canadian equivalent unless you kind of think of CMHC holding half of all Canadian mortgages on their books!

Until home values stabilize we can keep using the quote from Lily Tomlin: Things are going to get a lot worse before they get worse.