Sub-prime mortgages are increasingly difficult to obtain
The credit crunch which led to the Northern Rock crisis was the result of a more hard-headed approach to risk by international lenders. Now there is evidence that a similar scenario is being played out at the consumer level in the UK.
Since the Northern Rock crisis, many mortgage lenders have increased interest rates on sub-prime mortgages. Some have withdrawn deals altogether.
One company - Victoria Mortgages - recently went bust because their own lenders pulled the plug.
And a table of 26 lenders drawn up by Moneyfacts.co.uk shows that other firms, like the Alliance and Leicester, have increased all sub-prime fixed-rate mortgages by up to 1.5%. All the firms surveyed have either raised their rates to sub-prime borrowers, or limited the circumstances in which they will lend money.
HIT BY THE SQUEEZE
Multiple credit card holders
Sub-prime mortgage applicants
In the United States, where the current crisis began, the situation is just as bleak for sub-prime firms. On Monday one of the biggest lenders - Nationstar Mortgage - announced it was no longer accepting new loan applications from brokers. Analysts saw this as a sure sign that the lender was winding down its operations altogether.
There are further signs that the days of easy credit for all are coming to an end. On Monday Barclaycard confirmed it had reduced credit limits for 500,000 of its customers. A Barclaycard spokesman said a review the credit-worthiness of all its 9.6m UK customers had begun last year, and was not linked to the Northern Rock affair.
"We became aware in 2006 of the growing potential problem of bad debt, and our review was a response to that," said the spokesman.
Affected by the restrictions are the so-called "risky" customers: such as multiple credit-card holders who borrow to pay off their loans. For the first time Barclaycard is turning down more potential customers than it approves: latest figures show that the company granted credit cards to just 48-49% of total applicants
Winners and losers
But there are winners as well as losers in the equation: so far there's no evidence that credit in general is getting more difficult to obtain.
Lisa Taylor of Moneyfacts.co.uk said: "Overall we haven't seen much change in interest rates on credit cards since Northern Rock happened. In some cases the rates have actually come down: for example, Halifax is now offering 15 months rather than 12 months interest free credit on transferred balances.".
It's a similar story in the international markets. According to Cameron Marr, the UK head of Belgium's biggest banks KBC, the biggest casualties of the credit crunch are likely to be the controversial private-equity firms and other market players who have hitherto depended on the availability of plentiful credit.
He said that, while there are signs that the current crisis will pass, its legacy will be a much more disciplined and cautious approach to lending throughout the industry.
"It's been called a credit crunch, but actually what we've been seeing began as a liquidity crisis," he said. "The crisis of confidence inspired by the collapse of the US Sub Prime Mortgage market resulted in commercial banks being much more unwilling to make loans and the interbank market dried up."
Many Barclaycard customers have found their credit limits have been cut
At the same time, banks who used to sell their loans to other banks have found that those loans have lost value because of the credit squeeze.
This was underlined on Monday when sources close to Deutsche Bank indicated to Reuters that profits could be hit by up to 1.7b Euros because the debt had become much harder to "sell on".
Mr Marr sees signs that liquidity is returning to the international money markets, pointing to a reduction in the reference rate (LIBOR) at which banks lend money to each other. At the height of the "crunch" the 3-month LIBOR rate stood at 1.25% above base. By Monday it had dropped to 0.6% above base.
He predicted: "From now on banks will be much more careful about lending. The underlying quality of loans will be improved and lending criteria will become stricter. There'll be an increase in the pricing paid by companies and leveraged buy-out pricing will increase.
"The winners will be commercial banks who lend off their own balance sheets: the losers will be the CDOs (Collateralised Debt Obligations) and companies that mimic banks but who have no cash of their own, or lack large bank backing. . And because the private cash pool has shrunk, private equity companies may have problems doing the same type of deals as they have done to date."
The lesson for borrowers - both domestic and international would seem to be this: if you are seen as a "good risk", your chances of obtaining credit in the current situation would seem to be largely unaffected.
But as more firms adapt the Barclaycard strategy of weeding out their sub-prime borrowers, so times will get tougher for those who often need the money the most.