Credit Crunch Explained It has been well documented that the mortgage crisis and subsequent credit crunch are the two main causes of the current economic recession. But what caused the mortgage crisis? The very beginning of the crisis started long before 2007, even before George W. Bush lived in the White House. It really all began in 1977 with the passage of the Community Reinvestment Act and the following regulatory and legislative changes enacted by Bill Clinton. This effectively forced banks and mortgage brokers to loosen requirements for obtaining mortgages. This coupled with the excess global capital that was available at the time created a "perfect storm" for banks, who subsequently issued billions of dollars in subprime mortgages.
Credit Crunch Explained-Cont With money finally available to many who, for the first time, could qualify for a loan, demand skyrocketed which created abnormal appreciation of real estate equity that was hard to track. With the high turnover of homes at prices far beyond their intrinsic value, an economic bubble was created. Many of the new applicants had never owned homes before. They were either naive enough to believe that their adjustable rate mortgage would not rise enough to hurt them, home appreciation would keep up with the rising rates, or the cost of living changes would impact them in a positive way. For awhile, they were correct. Many ARM's did not start adjusting until 3-5 years after they were originated, and while banks were still pumping out money, speculation continued to rise, the economy was going great, and homes were still appreciating. It's hard to estimate when a ceiling would be hit, but there were many warning signs that were ignored, which places even more blame on lenders and the personal responsibility of borrowers.
As the "bubble" expanded, no longer were mortgage backed securities safe investments, In the past they were built on a solid foundation of "safe mortgages" with substantial down payments and a steady flow of payments. But with low risk, came low reward. What led to the collapse was not the micro scale action of approving a loan that shouldn't have been approved. The collapse didn't take place due the actual foreclosure of a mass number of loans. The collapse was the result of the equity based securities that were purchased, at one time with triple A ratings, on the secondary market that ended up being worthless. Holding companies purchased large packages of sub-prime mortgages - but why not? They were after all insured and backed by the government and at the time, held high investor ratings. Obviously, these loans didn't turn out to be the money makers that investors hoped.
Home Value Statistics As more borrowers stop paying their mortgage payments (this is an on-going crisis), foreclosures and the supply of homes for sale increases. This places downward pressure on housing prices, which further lowers homeowners' equity . The decline in mortgage payments also reduces the value of mortgage-backed securities , which erodes the net worth and financial health of banks. This vicious cycle is at the heart of the crisis.
Credit Crunch Summary
In a nutshell, legislation allowing otherwise unqualified individuals to obtain financing, a set of circumstances were set into motion that have caused damage to our economy that hasn't been seen in decades.
Today Today, the good news is the data above suggests that foreclosure rates have stabilized year to date in 2010 and median home sale prices are again on the increase. The length of time for complete recovery of home values has been estimated by dividing the lowest point of depreciated home values (34%) by the average annual home value appreciation rate of 5%. Essentially 6.8 years.
How do lenders make decisions?
What Does Five Cs Of Credit Mean?
This is method used by lenders to determine the credit worthiness of potential
borrowers. The system weighs five characteristics of the borrower, attempting
to gauge the chance of default.
It is method of evaluating a borrower that incorporates both qualitative and
The first factor is Character , which refers to a borrower's reputation.
Capacity measures a borrower's ability to repay a loan by comparing income against recurring debts.
The lender will consider any Capital the borrower puts toward a potential investment, because a large contribution by the borrower will lessen the chance of default.
Collateral , such as property or large assets, helps to secure the loan.
Conditions of the loan, such as the interest rate and amount of principal, will influence the lender's desire to finance the borrower.
How do lenders make decisions?
Character - is typically measured by the applicant’s FICO credit score. A FICO score of 700+ indicates very good credit, and a FICO score below 600 is considered poor. The most important factor in determining a FICO score is past payment punctuality. The percentage of credit limit used is another critical parameter in the FICO score models, with a penalty for using too much of available credit.
Capacity – is indicated by the borrowers Debt to Income (DTI) ratio. Your debt-to-income is the relation between what you owe and what you make. To calculate your ratio, take your monthly debt payments (such as house, credit card, and payments) and divide it by your monthly gross income. A DTI of 45% or less is considered good.
Capital – is essentially the cash contribution or “down payment” provided by the customer. Customers that make larger down payments typically are less likely to default.
Collateral - is a borrower's pledge of specific property to a lender , to secure repayment of a loan. The collateral serves as protection for a lender against a borrower's default - that is, any borrower failing to pay the principal and interest under the terms of a loan obligation. If a borrower does default on a loan, that borrower forfeits the property pledged as collateral and the lender then becomes the owner of the collateral.
Conditions – The conditions of a loan include the length of repayment term and Interest Rate. Interest is the price paid for the use of borrowed money. Interest is compensation to the lender, for risk of principal loss. Higher risk loans will have higher interest rates. Longer term loans will have higher interest rates
BBVA is a financial services group with more than $755 billion in total assets, 48 million clients, 7,400 branches and approximately 104,000 employees in more than 30 countries. BBVA provides its customers around the world with a full range of financial services, including commercial and wholesale banking, retail banking services, consumer loans, mortgages, credit cards, securities brokerage, wealth management, pension plan management and insurance. The BBVA Group maintains a leadership position in Spain, Mexico, Latin America and the Sunbelt Region of the United States as well as operations in China, France, Germany, Hong Kong, Italy, Japan, Singapore, Switzerland, and the United Kingdom.
What Makes BBVA Different
BBVA: An Internationally Diversified Group Mexico Market Leader USA South America 1st/2nd by market shar e Asia / China 1st Spanish bank to enter China Spain 1st/2nd by market share 48.1 m customers 32 countries Assets: $770.8 bn Key figures 2009 Net attrib. profit: 7,787 Branches: Employees: Market Cap:
3 rd in Europe
$7.3 bn $57.4 bn 103,721
7 th Worldwide
BBVA is one of only four banks worldwide to enjoy an AA or better rating by S&P.
BBVA is the only major bank in the world that has not raised capital or received government assistance.
Global Finance recently ranked BBVA 21 st in its 2010 list of the “Worlds Safest Banks.”
BBVA is ranked as one of the top 20 financial services companies in the world based on market capitalization.
BBVA continues to outperform its peers in any measure of credit quality and has a proven track record of outperforming the industry in both good times and challenging environments.
BBVA Among the Safest Banks in the World
The ratings from Aa to Ca by Moody's may be modified by the addition of a 1, 2 or 3 to show relative standing within the category where the highest within the rating is 1 and the lowest is 3. BBVA Among the Safest Banks in the World Imminent default or in default C Very poor quality Ca Substantial Risk 24.73% Caa Very speculative 6.53% B Below investment grade. "Junk Bonds" Low grade 1.21% Ba Minimum Investment Grade 0.15% Baa High Quality 0.01% A Very High Quality 0.02% Aa Investment grade bonds. Highest Rating Available 0.00% Aaa Notes Definition Average Default Rate Within One Year of Rating (1970-2001) Moody's Rating
BBVA Standing Strong – Financial Highlights To be adequately capitalized under federal bank regulatory agency definitions, a bank holding company must have a Tier 1 capital ratio of at least 4%, To be well-capitalized under federal bank regulatory agency definitions, a bank holding company must have a Tier 1 capital ratio of at least 6%,
BBVA: Growth in the U.S. BBVA Legacy 2006 2007 2009 2005 Rio Grande Valley General Market Leadership in the Sunbelt BBVA Puerto Rico 1968 BBVA New York 1987 Bancomer Transfer Services 1994 Flagship of the United States franchise 2004 FDIC showed confidence in BBVA Compass’ ability to take over a troubled institution
BBVA Compass is a Sunbelt-based financial institution which operates 717 full-service branches in Alabama, Arizona, California, Colorado, Florida, New Mexico, and Texas. Compass is among the top 15 largest commercial banks in the U.S. based on deposit market share and ranks among the largest banks in Alabama (3rd), Texas (4 th ) and Arizona (5 th ). Through three major business units - Corporate Banking, Retail Banking and Wealth Management - Compass offers innovative and industry leading products and services to meet their financial goals. In addition to meeting the needs of our clients in the communities we serve, as a subsidiary of the BBVA Group our clients also have access to a full range of international products and services in more than 30 countries. About BBVA Compass
The Sunbelt Region has become one of the most attractive within the U.S., the biggest economy in the world. Since 1978, real GDP growth in the BBVA Compass Sunbelt has been positive every single year, averaging almost 4% per year, about 40% higher than in the rest of the country. BBVA Compass is a regional banking leader with more than $65 billion in assets and 717 branches across the Sunbelt. BBVA Compass has leading positions in the Sunbelt including the 3rd largest bank in Alabama, the 4th largest bank in Texas, and the 5 th largest bank in Arizona.
BBVA Compass: Deposits by State
New Mexico: 2.4% Texas: 6.8% BBVA Compass: The Leading Regional Bank in the Sunbelt … in markets that are expected to continue outperforming the U.S. National average in terms of economic growth Deposit Market Share (%) California: 0.4% Arizona: 3.7% Colorado: 1.5% Alabama: 10.7% Florida: 0.5% $41.6 billion in lending 717 branches in 7 states $46.5 billion in deposits 11,367 employees Note: As of June 30, 2010
MSA 387 Banking Centers in Texas Texas represents almost 60% of BBVA Compass’ operations based on deposit market share. Source: FDIC, SNL Securities Mkt Share Ranking TEXAS Houston Dallas-Ft. Worth McAllen Laredo Austin San Antonio Beaumont Brownsville Waco 6.8% 6.6% 4.8% 30.9% 39.2% 8.4% 6.9% 22.2% 21.1% 13.0% 4 th 5 th 4 th 1 st 1 st 4 th 5 th 1 st 2 nd 1 st BBVA Compass: A Strong Franchise that Ranks 4 th in Market Share in the Lone Star State
BBVA Compass Key Facts
BBVA Compass continues to be well positioned in this economic climate with solid liquidity and capital positions.
BBVA Compass has generated more than $22 billion in new loan originations over the past two years including $9.2 billion
Recently, the Small Business Administration (SBA) named BBVA Compass the First Mortgage 504 ‘Lender of the Year.’
This marked the second consecutive year BBVA Compass has been recognized as one of the premier SBA lenders.
Like BBVA, Compass has a conservative credit culture. The bank was not involved in subprime lending or liquidity lines for
Conduits or Structured Investment Vehicles.
BBVA Compass Debt Ratings
BBVA Compass: Innovation & Technology Upgraded Mobile Banking Launched New Credit Card Programs BBVA Compass announces strategic alliance with Social Money Leader Affinity Banking Programs Launched Business Build-to-Order® Checking Account Launched BBVA Compass MarketLink CD Launched First-Time Home Buyer Program Upgraded Internet Banking Platform Launched Build My Savings SM account