The Credit Crunch

by Glenn S. Welch

The Credit Crunch: What caused it and how will it affect you and your business? The main cause was due to investors reaching for higher yields, which allowed lenders to generate and sell mortgage paper at rates higher than the market rate for borrowers with problem credit or inadequate income levels to support their loans. Everyone seemed to be betting that the growth in housing, one of the brightest spots in the economy over the last 5 years, would never end. However, as adjustable rate mortgages (ARM’s) began to adjust and the inventory of new and existing homes began to increase, problems began to show and delinquencies and foreclosures began to rise. There is plenty of finger-pointing going around with borrowers indicating that lenders suggested they lie on applications. Lenders argue that all terms and conditions of mortgages are spelled out in documents signed by the borrower and that they should have been aware that their monthly payments could rise. We may never get to the bottom of who is right and who is wrong. However, as a local banker, I must point out that a review of foreclosure listings in the local paper will show a vast majority of the filings coming from large nationwide banks and mortgage companies.

The result of this activity is a return to higher credit standards especially in the residential mortgage market. Subsequently, there is much concern over whether the credit tightening will cause the economy to slow and possibly lead to a recession. So the question is should you put off your expansion plans? You need to consider how the economy impacts your particular business and whether a recession will result in your inability to generate the income necessary to support any existing and/or new borrowings. However, you should not be concerned that you will be unable to obtain the financing you need if you have a good track record of paying your bills and in creating positive financial results. Many of the banks in the Springfield market have done partial or full conversions from mutual banks to stock banks in the last few years in an effort to raise capital. These offerings were successful in the banks increasing their capital in excess of several hundred million dollars. Ultimately, the goal of all of these institutions is to leverage this capital by investing it profitably in new assets. So if you have a dream, a business plan, and a need for financing, I recommend that you contact your local banker today.

Glenn S. Welch is the Executive Vice President of Hampden Bank, a Corporate Partner of the UMass Family Business Center. He can be reached at 413.452.5144 or gwelch@hampdenbank.com