A credit crunch could occur because of the threat to the lending industry as foreclosures grow into multitudes. The subprime mortgage crisis has caused banks and other financial institutions to stop lending or at least to limit that lending. This has happened because of their fear that investors won't be investing money into the lending industry. This will not only affect mortgages but it is likely to affect commercial loans, industrial loans, and revolving credit. There will be a stream of available homes on the market due to the foreclosures but not many buyers which will cause an imbalance between supply and demand. In addition, the value of homes will decline thus making it difficult for homeowners to sell.
Homeowners who have difficulty selling are bound to decrease spending. Significant decreases in consumer spending will affect the economy. The impact of the subprime mortgage crisis on consumer spending could lead to a recession. The decrease in spending will also cause uncertainty in investment markets so buying and selling will decrease. With fewer investments it will be hard for lenders to find backers to finance loans. The only loans that will be made are ones that lenders have confidence in with creditworthy customers. This will make it extremely difficulty for the average person to borrow money which will also cause a decrease in consumer spending. The decrease of investments will affect the flow of capital in the economy both nationally and globally.
If the Federal Reserve lowers interest rates the economy might receive enough stimulation to thwart the upcoming threat of recession. The subprime mortgage crisis might not be as detrimental if banks would work with consumers to allow them to stay in their homes instead of losing them to foreclosure. Lenders could allow homeowners to refinance their homes with a lower interest rate which would result in lower monthly payments. Losing interest money would be better than having homeowners default on loans completely. Homeowners who seem to be less than creditworthy might surprise lenders if they were not subject to such high interest and other types of fees. Generally people want to do better but when they are given a chance to do better it often comes with a high price. On the flip side, some people may need to learn to have integrity when making an agreement with a creditor and should sincerely try to follow through instead of defaulting on loans. "Let integrity and uprightness preserve me; for I wait on Thee" (Psalm 25:21).
The decline of housing prices is not the only sign that a recession may be taking place. Other indicators may include stock market crash, businesses stop expanding, and unemployment rises. The impact of the subprime mortgage crisis can affect wealth, retirement savings, stock prices, and home equity. One way that a recession can be detrimental to individuals is if the recession becomes so bad that employers layoff workers. The decline of housing prices will cause a decline in building which will mean fewer construction jobs. However, the largest percentage of the economy is based upon consumer spending. So as consumer spending declines reductions in income will result which will lead to even less spending.
Homeowners who find themselves in a declining situation soon to undergo foreclosure on their home should talk to their mortgage company or bank and find out if there are any options available to help. Loan counselors should be able to answer questions about any new programs out there that may be able to help a homeowner keep their home. The subprime mortgage crisis may lead to programs or refinancing for those who need it. Doing a search on the Internet may also provide some information that might be helpful.
A potential buyer should beware of lenders who target consumers who may have a hard time financing a home. Some of these types of mortgages harbor excessive fees and variable rates that make a monthly payment double within a short period of time. The impact of the subprime mortgage crisis will hopefully deter these types of lenders in the future. A potential home buyer should also be aware that predatory loans have abusive prepayment penalties. A prepayment penalty can amount to thousands of dollars on a home loan. This would apply if a buyer tried to refinance to get a lower interest rate. The best way to go about purchasing a home is to go to several different lenders to see if they all say the same thing. Before closing and signing a contract have an attorney present to look over the contract to make sure that the buyer's interests are covered.