The market is changing and anyone that tells you it isn’t is lying.
The main question that we are being asked of us at the moment is ‘this business of the credit crunch – is it affecting anything?’. The short answer to this is yes. The longer answer is somewhat more complicated.
Undoubtedly the commercial funding market has changed significantly, even since Christmas. We are finding that deals that were approved ‘in principle’ in November are now having to be resubmitted to the lender’s credit department and coming back with interest rate increases , loan to value revisions and in some instances, flat refusals to take the deal on.
There’s more to this than meets the eye but the underlying reasons for this are quite interesting (if you are interested in that sort of thing..). What seems to have happened is that at the back end of last year there were lots of lenders about who were using the securitisation model of lending where they basically repackaged the debt that they wrote and sold it on in the secondary debt interbank markets. The interbank markets have now seized up with Banks not trusting each others underlying debt security. This means that the securitisation lenders have either withdrawn from the market completely or are only lending to people they know.
Long winded explanations aside, the main lenders left in the market are specialist departments of the Banks that can on the balance sheet model ie. those that lend against their deposits.
Now those balance sheet lenders have realised that they are the only players left in the market and that conditions have become more difficult. Perhaps unsurprisingly, they have started to realise that they can charge more or the same for the same or inferior products. This is the law of supply and demand in full effect.
It’s good news from a broker perspective as we still know the people that lend the most aggressively and cheaply in the market but not so great for those clients looking to do the deals on their own as existing sources or direct bank contacts dry up.
I don’t think we’ve seen the end of this by any means as I was warned about the sub prime exposure that some of the big city firms were sitting on at the start of ’07 and it’s only just starting to filter through. I’d expect to see more fallout from the sub prime stuff (especially that no-one has yet looked at some of the crap lending that has been done in this country yet) and perhaps job losses in some of the big Banks as the new business hunters that have been taken on in great numbers in the last few years have their wings clipped.
Doom and gloom I’m afraid but by all accounts Brokers are more useful in poor markets so I look forward to the rest of ’08 with interest.