Sample Essay

UK mortgage lenders did not lend so many bad mortgages. Although mortgage lending became more relaxed in the past few years, it still had more controls in place than the US. However, it caused very serious problems for Northern Rock. Northern rock had a high percentage of risky loans, but, also had the highest percentage of loans financed through reselling in the capital markets. When the subprime crisis hit, Northern Rock could no longer raise enough funds in the usual capital market. It was left with a shortfall and eventually had to make the humiliating step to asking the Bank of England for emergency funds. Because the Bank asked for emergency funds, this caused its customers to worry and start to withdraw savings (even though savings weren’t directly affected). (BBC)

As a result of the credit crunch, the UK saw a change in the mortgage market. Mortgages became more expensive. UK Banks continue to face problems too. HBOS (Owner of Halifax) struggled to finance its balance sheet. Like Northern Rock, it financed an expansion of lending by borrowing. Now money markets have frozen up, they couldn’t raise enough money to maintain liquidity. (BBC)

Now that mortgages are difficult to get, demand for houses has slumped. Therefore, house prices have fallen. Lower house prices mean many face negative equity. Therefore, mortgage defaults now cost banks even more (because they couldn’t get back the initial loan). Bradford & Bingley was nationalised because it couldn’t raise enough finance. The B&B had specialised in buy to let loans, which are particularly susceptible to falling house prices. (BBC; Mortgage Guide)

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