The Bankwatch

Tracking the consumer evolution of financial services

Economy provides opportunity to differentiate between traditional lending and social lending

There is a general sentiment that a consumer credit crunch is coming to North America, in the wake of the sub-prime mortgage debacle.

This from Gallup explores the old causes of a crunch arising from a dramatic drop in liquidity, and points out despite a worldwide glut in liquidity, the potential exists for a credit crunch now.

Looks Like an Old-Fashioned Consumer Credit Crunch

What causes a credit crunch? In today’s financial markets, many lenders make loans but do not hold them in their portfolios. Instead, they sell them to investors in the form of securitized investments. What appears to be happening in recent weeks is that the huge losses associated with some subprime mortgage investments are not only creating significant new risk premiums but also causing potential investors to shun all mortgage investments not guaranteed by Fannie Mae, Freddie Mac, or Ginnie Mae.

For example, on Friday various mortgage lenders announced that they could no longer sell various types of jumbo mortgage loans and special feature mortgage loans to the investment markets. As a result, some lenders decided to stop making various types of mortgage loans and sharply increase the pricing of the loans they would make.

The key will be the extent to which the effect spills over into unsecured, and personal loan lending. 

I would argue that social lenders will view things differently, because the issue for them is not Bank liquidity.  Nor is the issue a change in borrower circumstances, caused by changes in the employment market, or high inflation.  Social lenders are well placed to represent borrowers well, and it will be interesting to watch how this plays out for the relative competitiveness of social lenders, in North America.

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Written by Colin Henderson

August 6, 2007 at 15:55

One Response

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  1. Great boys51610269cb180872ae7274807694f9e0

    Yhanks you

    January 31, 2008 at 08:54


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