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To: Giordano Bruno who wrote (364877)	4/8/2008 7:52:40 PM
From: ldo79	Respond to of 436258

The credit crunch is about to get very personal With global losses put at just under a trillion and house prices falling, the financial crisis will soon be hitting home * Deborah Hargreaves * o Deborah Hargreaves o The Guardian, o Wednesday April 9 2008 The global credit crisis may appear to be taking place in the upper echelons of the financial system. But with the IMF yesterday estimating losses at $945bn and Halifax reporting house prices falling at their fastest rate since the early 1990s, it will not be long before it affects all of us. This is where the credit crunch gets personal. The lack of financing for the banks and their reluctance to lend to each other means they have less to offer in loans and mortgages. At the same time, house prices are falling for the first time in a decade. Banks are fighting their way to the bottom of the best-buy tables by raising rates and withdrawing mortgages. This is despite expectations that the Bank of England will cut interest rates this week. It hardly matters what the Bank does. The high street banks, worried about the fragility of house prices, are being forced to return to basics, and customers with less-than-perfect credit records could find it hard to obtain funds. This is a far cry from the routine over the past decade, when banks were falling over themselves to lend. There were mortgages available for 110% of a house's value - even 125% for Northern Rock's borrowers. The financial engineering of recent years enabled banks to lend ever-increasing amounts since they were able to offload debts from their balance sheets. No longer did they have to take in more deposits before they could lend. They could instead turn to the international money markets for their funds, where credit was freely available. The banks' easy lending practices fostered a debt-dependent culture. Consumers racked up a cumulative £1.4 trillion in debt last year - equal to the output from the British economy. The debt binge helped fuel retail spending. But the main outcome of loose credit has been a tripling in house prices since 1998. The average homebuyer now needs to spend a record six times their annual income to buy a house in the UK. The rising housing market has made those lucky enough to own homes feel wealthy and confident. Homeowners have been withdrawing equity from houses to spend on building extensions, overseas holidays and luxuries. The job market has also been buoyant. That is all changing. The credit crunch has exposed the flaw in the products at the centre of the financial engineering of the past decade. Many were based on US sub-prime mortgages which have now defaulted. Banks have had to impose successive write-downs as their holdings fall in value. Proponents of the innovation that developed these complex products say it made the system safer by spreading risk. But once those products turn out to be almost worthless, it is difficult to find out who is holding them. Banks are wary of lending to each other in case their rivals are hit by further sub-prime losses and they don't get paid back. Banks can't borrow, so they won't lend. The last 100% loans were withdrawn by Abbey this week. Most lenders are now charging higher rates for those with small down payments. Halifax said last week that by offering better rates to those with a deposit of more than 25%, it was rewarding prudence. What Britain's biggest mortgage lender should have said was that it was rewarding middle age, or those lucky enough to have been on the housing ladder for more than five years. How long will it take a first-time buyer to save £45,000 as a deposit on a house costing £180,000? So far, this has affected those who want a mortgage most. More than 20% of mortgage products were withdrawn in March. But banks are reining back all their lending - to individuals and companies. For many small companies, a rise in the cost of their borrowing will be enough to tip them into bankruptcy. That is bound to affect jobs. As the cost of funds increases, companies will cut back on investment and employment. Trust in the financial system has also eroded. Savers who should benefit from the attractive accounts available as banks scramble to raise funds are still concerned about protecting their money after the run on Northern Rock. The wider economy so far appears little affected by the global credit crisis. But few economists believe we will be insulated from the downturn. Some say we are at the point reached by the US nine months ago, when lagging indicators such as employment numbers were still healthy. The US has since plunged into recession. Unemployment is rising, house prices have fallen by a quarter and repossessions are at record levels. A fall in the price of homes will help first-time buyers, but the rising cost of borrowing will still make it just as hard to get onto the housing ladder. A weak housing market will make homeowners feel poorer and lead to a cut back in spending. As Britain's economy falters, the pound has slipped to a record low against the euro. That makes imports more expensive and food prices are rising. It means that struggling homeowners won't even be able to have a cheap holiday on the continent this year to cheer themselves up.