Financial Crash – What Really Happened!

As you may or may not have noticed we are still in the midst of continued austerity. So you may continue to ask yourself just what happened and who was to blame.

Well this is definitely a game of two halves (pardon the pun) but the two main issues are as follows.

Labour Spent all the Money

WHAT? you may be asking yourself, how can a government spend all the money.

Well as stupid as it sounds, thats exactly what Labour did before leaving office in 2010. They actually left a letter which read “Dear Chief Secretary, I’m afraid there is no Money”, sounds unbelievable but it is true. see for yourself.

Whether or not this was some attempt at humour, it did sadly reflect the mess they left behind, which was the beginning of Austerity. Whilst I disagree with some of the methods the government has done to get the country out of this mess, sadly some of it is necessary. Although attacking easy targets such as benefit claimants, disabled, etc is not the right way to get the job done.

The end thing to take away from this is Labour got us into this position in the first place.

Banking Sector Collapsed after Housing Bubble Burst

Subprime – What is it?

You have most likely heard from most people the issue that collapsed the banks was the subprime housing market.

If you don’t know what the subprime housing market is, its simply the riskier side of the mortgage sector, usually consisting of mortgages up to and over 100% of the value of an equity, as well as people who are unable to get a mortgage from a high street bank. This attracts more interest as its riskier for the lenders should it turn sour.

Banks Deal in Money Not Stuff!

You may have noticed that when you go to your bank you can only obtain finance based products, such as mortgages, loans, current accounts etc. You don’t go to your bank to buy a house, you go to them for the mortgage to buy the house.

Now that we understand what banks actually deal in, you need to know that anything a bank loans money against has to have a equal or higher value than the actual amount of money loaned, whether that be a mortgage or secured loan.

Now we have the basics of the two major issues, what actually happened!

Where Did It All Go Wrong?

In short it was somewhat of a mix between people who had taken out mortgages which they could not really afford and mortgages being given for houses that were overvalued.

Subprime was not the issue.

People taking out mortgages and loans they could not afford and then defaulting on them, caused part of the problem with the financial crisis, as banks were left with the tasks of liquidating housing stock they loaned money against, and in some cases they had actually loaned over 100% of the asset value. This mean they took a huge dent in their assets.

So although the subprime market played its part in the crisis,it was not actually the main problem.

Greed and Inflated House Prices

Now we hit on the real reason for the financial crisis. GREED

The problem is that if you offer someone better than they have, they will inevitably take it. This is exactly what happened, but it was done from two different sides of the same coin.

Selling off Social Housing Stock / Council Housing

You may not know that if you live in social housing for over a certain numbers of years, you get what is called ‘a right to buy‘, being honest a Conservative policy brought in by Thatcher which I think is wrong, but not only do you get a right to buy the property, but you also get a discount off the market rate. This varies from around 5% to over 70%.

So what we had were people buying their social housing stock at below market rate and initially they were just happy to be home owners, then the housing boom struck, thousands of people sold these housing for way more than they paid for them. They made a chunk of money which then allowed them to move up the property ladder, in most cases these people were able to obtain mortgages from high street lenders due to the huge deposits they put down, meaning they now had a mortgage on a new property valued at way above real market value.

Estate Agents Overvalued Property

In the world of property the main value of the assets in the profession, property, is only able to be valued accurately  by Chartered Surveyors RCIS members, the problem is in the world of Estate Agents only a small amount are actually qualified Chartered Surveyors, most simply use their ‘so called’ experience to value homes.

The RCIS actually wrote a report of this problem and what it caused in the housing market.

So What Happened?

Banks were loaning money against assets, in this case property,based on the set market value. A value set by the estate agents, a value which was in reality inflated and way above real world market value. For every mortgage a bank loaned, they were left with a property. Which as we said before is not what banks deal in. They then had to use this asset to loan money from others, including other banks, private individuals, corporations. This would allow them to continue the cycle of loaning money to others and making more money.

This lead to the housing bubble and its subsequent burst, people entering the market with your normal everyday jobs, becoming property developers, landlords, due to buying Social Housing stock without the assets to cover any downfall in the value of their portfolio. In some cases people could not actually afford to pay their mortgages leaving the bank with nothing to regain the money they loaned from.

“I never missed a mortgage payment”

In other cases people were living in houses which were now actually worth less than they paid for it, these people always say stuff like “I never missed a mortgage payment”. The problem is the mortgage they are paying off will take them anyway from 10 years to 40 years to repay, thats how long it will take the bank to get their money back.

All this time the bank to which they have a mortgage has an asset, which is now worth way less than they loaned for it. So no matter if you pay your mortgage or not, the bank is stuck trying to obtain more money to continue the cycle with an asset that they have lost money on.

This lead to fixing in the financial industry such as the Libor rate. So before you start blaming the bankers or subprime market think of who the real people to blame are. I mean I don’t ever recall my bank knocking on my door to offer me a mortgage. Think about it!

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