The International Herald Tribune has an excellent summary of the credit crunch and how it came about. I rarely do this, but I consider this a must read for real estate professionals as it explains in layman’s terms exactly how and why the markets are in turmoil over the lack of credit arising from the mortgage industry in the United States. I have included my typical excerpt as you never know when the story will disappear, but please go to the original story and read it.
It will explain a great deal and help you educate your clients who are watching Wall Street trying to understand how it affects Main Street.
American Home, once the nation’s 10th largest mortgage lender, said it fell victim to “extraordinary disruptions” that effectively cut off the funding it needed to make new loans. Falling U.S. home prices and a spike in payment defaults scared investors away from mortgage debt, including bonds and other securities backed by home loans.
By then, banks worldwide were looking at their portfolios and finding sizable exposure and hedge funds were closing down in a bid to stave off investors who wanted to redeem their stakes, essentially, a modern day run on a bank.
On Thursday, France’s biggest bank, BNP Paribas, froze US$2.2 billion held in three funds because their exposure to subprime prime mortgages in the U.S. solidified fears that risk was spreading worldwide.
With cash reserves running low, banks were refusing to lend to each other and the interest rates that banks charged each other rose well above the 4 percent level set by the ECB, prompting its unprecedented injections on Thursday and Friday, followed in part by the U.S. Federal Reserve and central banks in Asia, too. via International Herald Tribune.