The Boomerang

The time bomb that was the credit crunch was born out of the refinancing boom that happened when people decided to use up the equity within their homes. Equity in a home is not a fixed metric that remains invariable whatever the circumstances. This was the case with the credit crunch. In order to arrive at a figure of equity, you need to make an educated guess at the price of the property in question within the constraints of the current market environment. Herein lays the danger because that price can be very arbitrary. It can depend on very fluid factors such the perception of the buyers.

A Case In Point

Take for instance a house that is supposed to cost three hundred thousand dollars in a good market. This means that the buyers and sellers at that particular point in time will have agreed that for a property of such features in such a location will cost three hundred thousand pounds. Some of the factors driving that price may also include the fact that there are many people who are competing for that house.

Now take that image down the line after five years. Unemployment is now rife and people can no longer afford to buy or sell houses. The prices are tumbling by as much as fifty percent. Meanwhile the original owner of the house has been forced to remortgage his property on the basis of a price of about four hundred thousand dollars. This figure was done on the basis that the broker and lenders would be making certain commissions from the deal.

The unemployment issues strike at the family and therefore there is no longer a main income to rely on. This leads to a lapse in the payment schedule for the home. The bank becomes suspicious and they put the family on a payment plan. Once again the family is unable to complete the payment schedules and therefore they are consequently removed from the house and it is put up for sale in the hope that it can cover all the outstanding bills.

That is when the time bomb becomes apparent. The house can only fetch at most one hundred and fifty thousand dollars, which is about half of what the original mortgage was. The homeowner is then left in a situation where they are unemployed, homeless but with a one hundred and fifty thousand dollar loan that is not secured against anything. That is when life really becomes uncomfortable.

A Global Disaster

Such sad scenarios as the one I have described above were repeated in hundreds of households across the globe as people tried to make sense of what was a catastrophe. The problems kept piling up and they drove each other deeper and deeper into a cycle of irretrievable financial meltdown. Even the great banks that had so benefited from the boom in the refinancing model faced severe pressures. Some people were reported to be contemplating suicide. All this is the result of an uncontrolled refinancing climate.