A capital crunch is what a credit crunch has also been defined as. There is usually a shortage in equity capital, and this limits lenders’ abilities to make loans, and this is especially true in regions that have been most affected by the subprime mortgage and financial crisis. In a credit crunch, lenders keep the capital they have instead of loaning it out because they are afraid of not being repaid due to increasing numbers of job losses, mortgage defaults, bankruptcies, and other factors that increase the risk of defaults on loans.
Fewer dollars available for mortgages is the impact that this has on the real estate market. Since there is less money available for mortgages, there is an excess supply of homes. The excess supply makes builders more wary about building new homes, and they may even stop building altogether. This scenario played out in various parts of the nation where foreclosures and bankruptcies increased an already over saturated real estate market .
Those involved in job loss, foreclosure and bankruptcy received derogatory information in their credit files, which has led to decreased credit scores. Low credit scores make it much more difficult to obtain credit and to get good terms on loans. Besides this, with increasing defaults, bankruptcies, and foreclosures, banks started to tighten up their lending standards to the point that they became far more restrictive than was typical .
Persons who ought to have been able to receive approval for mortgage loans were rejected. This added to the oversupply of homes in the real estate market as people who would have otherwise been able to buy a house could not do so. Before the housing market gets back to normal, the excess of homes has to be sold, but the bad credit ratings and restrictive lending policies, among other factors, are slowing that process.
Yet another factor affecting the real estate market is the correction in prices, where some areas have seen reductions of twenty-five percent and up. Because of the drastic drop in home value, some people owed more on their existing mortgage than they could get if the house was sold; this led to some homeowners deciding to go through foreclosure rather than continuing to pay on their mortgage.
For those purchasers who are struggling to get financed, the smartest practice remains not panicking. They ought to keep doing all of the things possible to improve their credit, mend their credit reports, and to boost their overall credit scores. As restrictive lending policies loosen, mortgage loans will become more available and they will be able to eventually purchase the house they desire.
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