Banks lend money to people and businesses. The money is used for investment purposes and consumer purchases like food, cars and houses. When these investments are productive the money eventually finds its way back to the bank and an overall liquidity of a well functioning economy is created. The money cycles round and round when the economy is functioning effectively.

When the market is disrupted financial markets tend to seize up. The liquidity cycle may slow, freeze up to a degree or stop completely. This is true because banks are highly leveraged. A well capitalized bank is only required to have 6% of their assets in core capital. It is estimated that the residential mortgage meltdown will cause credit losses of about $400 billion dollars. This credit loss is about 2% of all U.S. equities. This hurts the bank’s balance sheets because it impacts their 6% core capital. To compensate, banks have to charge more for loans, pay less for deposits and create higher standards for borrowers which leads to less lending.

Why did this happen? Once upon a time after the great depression of the 1930’s a new national banking system was created. Banks were required to join to meet high standards of safety and soundness. The purpose was to prevent future failures of banks and to prevent another disastrous depression. Savings and Loans (which still exist but call themselves Banks today) were created primarily to lend money to people to buy houses. They took their depositor’s money, lent it to people to buy homes and held these loans in their portfolio. If a homeowner failed to pay and there was a loss, the institution took the loss. The system was simple and the institutions were responsible for the building of millions of homes for over 50 years. This changed drastically with the invention of the secondary market, collateralized debt obligations which are also know as collateralized mortgage obligations.

Our government created the Government National Mortgage Association (commonly known as Ginnie Mae) and the Federal National Mortgage Association (commonly known as Fannie Mae) to purchase mortgages from banks to expand the amount of money available in the banking system to purchase homes. Then Wall Street firms created a way to expand the market exponentially by bundling up home loans in clever ways that allowed originators and Wall Street to make big profits. The big stock market firms were securitizers of mortgage-backed securities and resecuritizers who sliced and diced different parts of the groups of home loans to be bought and sold in the stock market based on prices set by the market and market analysts. Home loans, packaged as securities, are bought and sold like stocks and bonds.

In the quest to do more and more business, the standards to get a loan were lowered to a point where, at least in some cases, if a person wanted to buy a house and could assert they could pay for it they received the loan. Borrowers with weak or poor credit histories were able to get loans. There was little risk to the lender because unlike the earlier days when home loans were held in their portfolios, these loans were sold and if the loans defaulted the investors or purchasers of these loans would take the losses i.e. not the bank making the loan. The result today is tumult in our economy from the mortgage meltdown which has disrupted the overall financial system and affects all lending in a negative way.

Who is responsible for this situation? All loan originators, including banks, are responsible for turning a blind eye to loans that were based on poor credit criteria. Under the label of “subprime” loans there were low documentation loans, no documentation loans and very high loan to value loans- many of which are the foreclosures we read about on a daily basis. Wall Street is responsible for pumping this system into a financial disaster that may grow from the current $400 billion dollar estimate to over a trillion dollars. Realtors, mortgage brokers, home buyers and speculators are responsible for their willingness to pay higher and higher prices for homes on the belief that prices would only go higher and higher. This basically fueled the system for the mortgage meltdown.

Are there any similarities to the saving and loan crisis of the 1980’s? Between 1986 and 1995 Savings and Loans (S&L’s) lost about $153 billion. The institutions were regulated by the Federal Home Loan Bank Board and the Federal Savings and Loan Insurance Corporation. These entities passed laws that required the S&L’s to make fixed rate loans only for their portfolios. The rates that could be charged for these loans were determined by the marketplace. Imagine an institution with $100 million in loans at 6% to 8%. For years the interest rates on deposits were also regulated by the government. The interest rate spread between the two allowed institutions to make a small profit.

In 1980 the U.S. Congress passed the Depository Institutions Deregulation and Monetary Control Act of 1980 (DIDMCA). A committee was established in Congress. Over a period of years the committee deregulated the rates S&L’s could pay on savings. Nothing was changed with respect to what could be charged for home loans. Many institutions started to loose huge amounts of money because they had to pay market rates of 10% to 12% for their savings, yet they were stuck with their old 6% to 8% loans. Some executives in the savings and loan business referred to this committee as the damned idiots in Washington.

Many books have been written about these events. There is documented evidence of substantial wrongdoing by S&L executives who were trying to invest funds to save their institutions, sometimes for personal gains. Some were sophisticated criminals. Congress recognized their mistake in 1982 when the Garn-St.Germain Depositary Institutions Act was passed to allow S&Ls to diversify their activities to increase their profits. It also allowed S&L’s to make variable rate loans. It was too little too late. After bankrupt institutions were liquidated by the government, the surviving S&Ls were assessed billions of dollars by the Federal Deposit Insurance Corporation to replenish the fund that insures the depositors of all U.S. banking institutions.

The mortgage meltdown and the savings and loan crises are similar with regard to the presence of greed and criminal activity. They are very different with respect to the fact that the S&L crises originated from a broken government mandated regulatory system and the mortgage meltdown has been caused primarily by a system that went wild with greed.

This has impacted non-bank lenders such as private commercial finance companies that provide hard money real estate loans, purchase order financing and accounts receivable financing. Most of these firms have raised their prices and their origination standards for safety and soundness of operations.

The bottom line: Bank lending can be replaced by other sources such as commercial finance companies to some degree. Hard money, purchase order financing and accounts receivable financing will help some businesses grow during these difficult times. But for the average borrower, businessman, or business owner these are difficult economic times, caused by the mortgage meltdown, which are here to stay for several years.

Copyright © 2008 Gregg Financial Services

www.greggfinancialserivces.com

When you take on a loan no matter what happens you have to be able to carry on meeting the monthly repayments. Your lender will not let your repayments slide if you should lose your income and be unable to meet your repayments. While your lender might be willing to make an agreement with you in the short term, if you remained out of work for many months then you could be facing problems. Loan payment protection can give you an income to replace your own if you are made redundant. It can also provide for you, should you have to take time off from work due to becoming ill or if you were to have an accident.

The cheapest way to take out valuable loan payment cover is by going online and choosing to buy it independently. By searching and buying your policy this way you are able to get the information necessary to make sure cover is suitable. You will also be able to compare not only for the cheapest premiums, but also when the cover would start and for how long it would payout. These dates vary with the provider as does the premium. Loan cover can be taken with your loan from the high street lender and in some cases lenders are known to add on the cover without asking.

If protection is added on this way then you could quite possibly see your borrowing double. This is due to the protection being added onto the borrowing and then the interest is calculated on the total amount of the loan and the protection for it. You should always ensure that protection has not been added on when taking out a loan and when buying a loan online make sure that you are not being tricked into taking out protection at the same time. Sometimes when buying a loan online you have to un-tick a pre-ticked box if you do not want the protection including.

Usually providers will payout on your policy for between 12 and 24 months and during this time you receive a tax-free payment each month you remain unable to work or unemployed. There is also a period of time which you would have to wait before the cover would begin paying out and again this varies. Some providers will begin paying you after 30 days while others could ask you to wait for up to 90 before beginning payout. There are providers who would also backdate your benefit to the first date of unemployment or incapacity; again you have to check the conditions before buying.

Loan payment protection is a perfect solution to stop you worrying about how you would be able to continue meeting the repayments. It guards your credit score, as if you get behind on your repayments this would be affected and then future borrowing could be impossible. If you have large debts by way or loans or credit card the lender could take you to court. If this happens you could get a County Court Judgement against you and see bailiffs seizing your belongings to pay the lender what you owe.

Many people have the hope of staying in their homes for a lifetime, especially as they grow old. It is usually possible, but there are certain periods in life when people may need a little more help – mainly when it comes to shopping for food, cooking, or even taking a bath – and these periods tend to fall between the eighties and nineties. Other people need help even more frequently and this could mean that it is the right time to move to a geriatric home where a group of professionals will be waiting to take full care of them, and this is the exact time where long term care insurance becomes really helpful.

Families can sometimes realize when a relative is not able to share the house anymore. It can be a husband or wife, a father or mother or a grandparent. The house might have even been refurbished in order to comply with theolder person’s needs, and a nurse can be hired to help take care of them. Another action to be taken is to coordinate food and daily assistance. However, when these things have already been done, and they are still not enough, then it is time to ask for help.

The first question that pops up is where you can get the right help. Well, here are some answers to this and other questions that you may have when looking for a good place for you or your relative to move in this kind of situation. Sometimes the need of receiving help increases its size over time. An appropriate example could be a man who losses his wife at the age of seventy, and for the next years he will probably face problems dealing with cooking, and a good option for this can be going to eat at a center that cooks, especially for older people; but he can also have difficulties in driving and taking the stairs, and he would probably need to have an elevator in the building.

When this happens sons tend to manage the idea of taking their parents to live with them, but this is not always the right choice. Having long term care insurance can help you and your family deal with these eventual needs.

The benefits that must be taken into account regarding long term care insurance policies is that they offer the chance of living in a quiet place, where professionals can take care of the people 24 hours a day, and many people can also get this service provided in their own homes, which makes them feel safer.

Unsecured lending jumped suddenly during February 2008 by £2.4 billion it was revealed by the Bank of England, which is claimed to be as a result of a rise in students seeking loans to cover tuition fees and maintenance costs.

This is the claim by the Financial Times who said that student loans totalling £800 million has been partly responsible for the increase in unsecured loans.   

The Student Loans Company (SLC) is now paying directly to universities for first year students and second year students to help cover tuition fees since they were introduced in 2006.

The Student Loans Company said that two payments are made to universities each year, one in February and the second one in May. An SLC spokesperson said, “We will see a similar rise in unsecured lending on that date for the same reason. The two cohorts are now getting the loans and the amount will rise again next year by a third after which it will plateau. That will be it because you start the natural process of rotation where everyone is doing three year degrees. We will climb to a plateau next year, it is the expectation.”

The SLC also revealed that they were ‘almost certainly’ receiving the maximum numbers of eligible people taking up their offer of tuition fee loans. Each entitled student, a number in the region of one million undergraduates, will receive £2,000 a year to pay towards tuition fees which can be as much as £3,070.

However, the loans taken on by students is leading to three out of four graduates still amassing debts even after they have started their first job. Only a quarter of people leaving university with a degree are earning enough money to reduce their debts because of the high inflation figure the government is using to set student loan interest rates.

The government denied this claim, saying that students were only paying back in real terms, what they had borrowed. The average graduate is earning £18,000, and is paying back £219 a year on a £10,300 debt. However, the amount of interest added to account for inflation stands at £489. 

Shadow University’s Secretary, David Willets MP said, “Ministers claim student loans are interest free. But that is not the case in practice. The interest rate on student loans is over twice as high as the official inflation rate. Three quarters of new graduates in work are seeing their student loans continue to grow. They are getting into more and more debt. For the majority of this group, half of all new graduates, their loans are increasing even though they are making repayments to the Student Loans Company. Only the top 25 per cent of graduates in work are earning enough to see their debts fall.”

President of the National Union of Students, Gemma Tumelty said, “Graduates are already struggling to pay off thousands of pounds of debt and these huge increases in repayment rates are making things even worse. We have continually urged the government to review this unfair system and these figures only strengthen our case.”

When you first decide to take up Commercial Finance from a Commercial Lender, you need to consider what you have to offer as security for the loan. Items that you can use to secure a Commercial Finance package are generally property, revenue and equipment.

In the UK, most Commercial Lenders will require up 75% of the value of the loan. You will need to come up with as much as possible to secure the loan. The items you put up to secure the loan will be confiscated by the Commercial Lender should your fail to honor the terms of the loan. Let’s look at each of the things that can be used and how they work.

Property

This can be in the form of residential property owned by the principles involved in the business. It can also be existing commercial property that is owned by the business. Finally, it may also include the property you are purchasing, if the Commercial Finance package is being used to purchase property.

When you put up property to secure the loan, the lender will be looking at the equity value of the property first and the total value of the property second. They will also look at the payment history of any property that has not been paid for outright. When the lender has finished looking at the property you have, they will look at your account receivables.

Revenue

The amount of revenue generated on a regular basis. This can be weekly, monthly, quarterly and even annually to see if the income is there to support the payments on the Commercial Finance package. The lender will also look at what your potential for grow is for your receivables. Your previous growth history will help them figure that out. They will look at how much is left when you subtract all your account payables, except the loan repayment and it should be greater than 1.35:1.

Equipment

The degree to which this is helpful will depend on the type of commercial financing you are looking for and the type of equipment you are planning to use to secure the loan. If the equipment has a long shelf life, it will be more desirable than things that have a short shelf life. If your business is a trucking company, the vehicles and the equipment used to fix them could be used to secure commercial financing.

The parts that you would use to keep them running could not be used to secure commercial financing. This is because, once the part is used, it no longer exists to secure the loan. The use of a truck to secure the loan is better because it will presumably be around for a much longer period of time.

If your business is a factory, you could use the equipment you use to make the product you sell to secure commercial financing or a Commercial Mortgage. The supplies used to make the finished product would not be good because they are not going to be around once the product has been made.

This does not mean that short life-span materials cannot be used, but they are counted as general inventory in much the same way as office supplies would be. You need to keep in mind that anything you use to secure the financing from your lender will be lost if you fail to honor the terms of the finance package. The longevity of the equipment is something that will be looked at carefully by the lender.

This is because some equipment, in some industries, out date very quickly and loose value very quickly as well. If you work primarily with computers, your equipment and software will be outdated and worthless long before a loan would be paid off. Factory equipment, on the other hand, will still retain its value many years after the Commercial Finance start date and should satisfy your Commercial Lender.