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Credit Crunch & Mortgages
How has the credit crunch affected bad credit mortgage applications?
There has been a lot of press over recent months about the mortgage market and in particular, the adverse credit mortgage market and how the credit crunch has affected it. If you, like many other borrowers have wanted a none technical overview then this article should help.
Borrowers with bad or impaired credit apply for what is termed as an 'adverse credit mortgage' or a 'bad credit mortgage' there are other sections of this web site that explains what an 'adverse credit mortgage' or 'sub prime mortgage' lender is, so we wont be explaining about what they are on 
this page but will be looking at how they raise their monies for mortgage purposes and how this has effected the borrower - we will be keeping it none technical and will always try to use plain English rather than industry jargon.
Sub prime lenders, in the main raise their money in a couple of ways - the first is the wholesale money markets and the second is to use their own funds which is termed as balance sheet lending. Their are different views on which is the best way of going about raising mortgage funds for lenders and depending on who you speak to and how the market in general is performing at that time you will get different opinions on which way works best for the borrower – this article focuses on the wholesale money markets.
What are the wholesale money market?
The wholesale money market is a place where mortgage lenders (and other institutions) raise funds, all we are going to talk about are monies relating to mortgages.
The simplest and best way to describe how a lender uses the wholesale money markets is probably to compare it to your local shop buying in produce from a wholesaler, when you walk into your local shop you may see on the shelves 20 tins of beans, 15 tins of peas and 10 tins of carrots - the price you buy 1 tin of beans, peas or carrots will mainly be determined by how much the shop owner paid for the tined produce when he bought in bulk from the wholesaler. Mortgage lenders do pretty much the same thing when buying from the wholesale money markets.
The lender will buy the mortgage products in bulk at a rate of interest names the LIBOR rate (London Inter Bank Offered Rate) which is the rate of exchange banks lend money to each other. They may buy (or borrow) £5 million for their fixed rate deals and £7 million for their tracker rate deals, the cost the lender buys these mortgage products in bulk (at the LIBOR rate) will have a direct effect on how much they will cost the borrower at the lenders standard variable rate or associated lenders fixed or tracker rate. The credit crunch has effected pretty much every market globally - the mortgage market and the adverse credit mortgage market has also been effected and, as the price of borrowing money increases for the lender the price is increased by the borrower (the lender has little choice but to pass the increased costs on, just as a shop owner would) - if the cost to the lender would mean the end cost to the borrower would price the product out of the market then the lender will not borrow the money from the wholesale money markets which is why we have seen the number of mortgage products available drop over the last few months.
This can be seen as a simplistic view but we are keeping it jargon free remember!
What can the lender do to help the borrower get a bad credit mortgage?
Mortgage lenders are trying to lend competitively and in order to do this, with the cost to the lender increasing they need to be sure a borrower can afford any mortgage costs and payments associated with mortgages in general in order to minimise possible repressions or mortgage arrears a potential borrower may incur (the last thing any lender wants to do is reposes a property) - they also need to ensure the risk involved to the lender is minimised by reducing their equity stake in a property which in turn has a positive effect on their books and, if repossessions should be necessary they would have a greater chance of recouping their lending costs which again benefits their books and future borrowers (which we are not going to get into in this article).
One way of ensuring borrowers can afford a new mortgage is to 'tighten up' the lending criteria for a mortgage product. What that effectively means is the mortgage products will be harder to obtain by the borrower (especially a borrower with bad or adverse credit), whilst it will not make borrowing impossible it does mean less people would be 'eligible' for that lenders products. From an adverse credit point of view, to simplify things - a borrower with a £2000 CCJ in today's market, compared to 12 months ago would either need to have more deposit available (thus reducing the lenders equity stake in the property) or reduce the amount if bad debt - both options require more funds to be available by the borrower which is a pretty good indication of how solvent or financially stable a potential borrower is.
Should I bother applying for a bad credit mortgage with bad credit?
Whilst there are obviously very valid issues which have affected the mortgage market in general, they have affected the adverse credit mortgage market more directly as credit issues relating to mortgage products don’t really apply if the borrower has never had impaired credit.
That being said there are still a large number of mortgage products available and a large number of adverse credit mortgage lenders willing to lend within their given mortgage criteria and, if the credit crunch and tightening of mortgage criteria means borrowers can more afford a mortgage (which will result in less repossessions and less future mortgage arrears) then it can only benefit both the borrower and the lender.
If you want to know if you would be eligible for a mortgage or remortgage
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