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It’s crunch time

Captain Crunch, Time Crunch, Knuckle Crunch, Nestle Crunch – these are all familiar terms, but now we can add another crunch to the list: Credit Crunch. While we may be feeling its effects to some extent right now, is this just the tip of the iceberg? In this article, we will delve into the concept of the credit crunch and its potential implications for the financial industry.

In recent times, the credit crunch has become more apparent, with seven large companies filing for Chapter 11 bankruptcy protection in less than 48 hours. This rapid pace of restructurings, which included once-promising digital-broadcaster Vice Media LLC, marked the highest number of filings on record during a two-day period since at least 2008, according to Bloomberg-compiled data. It is a clear indication that the impact of the credit crunch is intensifying.

Jeff Haily, an expert from the American National Bank and Trust Company who accurately predicted the last credit crunch, believes we might be headed down that road once again. Haily cites rising interest rates and a slowing economy as indicators that loan growth could plummet by half. This forecast prompted his community bank to focus on higher-quality, higher-yielding credit rather than worrying about volume. This strategy resonates with others who have experienced similar credit crunch situations.

A credit crunch implies reduced liquidity and fewer loans.

Consequently, purchasers of loans will be selective and opt for those with the lowest risk profile. Additionally, recent changes to loan level price adjustments (LLPA) implemented by Fannie Mae and Freddie Mac, overseen by the Federal Housing Finance Agency (FHFA), will further compound the effects of a credit crunch. These adjustments involve lowering fees for high-risk borrowers while adding fees to low-risk borrowers. During a credit crunch, lenders will prioritize high-quality buyers, diminishing the benefits of the LLPA adjustments. This scenario will lead to disproportionately higher interest rates as a means of offsetting the changes.

To gain a better perspective on the severity of credit crunches, we can analyze data spanning over 30 years, dating back to 1990. The graph depicting credit availability reveals that periods of tight credit have only occurred twice: during the 2009 recession and housing crisis, and more recently, when several non-qualified mortgage banks faced significant challenges.

As professionals in the financial industry, it is crucial to prepare for a potential credit crunch. One solution is to align oneself with non-lenders such as Oaktree Funding, an organization that has secured funds immune to the effects of the crunch. Oaktree Co-CEO Kristopher Martin said of the pending credit crunch.  “We work with fixed income institutional investors that hold the loans as assets against their pending liabilities for the duration of the mortgage loan and are not force to sell loans for liquidity.”  

Moreover, Martin states that their investors are actively seeking to acquire more assets, encouraging loan officers to continue writing loans.

Talk to your clients

To navigate the shifting landscape of lending, it is essential to educate clients and realtors about the potential complications arising from a credit crunch. By disseminating informative videos and articles on the topic, loan officers can establish themselves as experts. This approach not only prepares clients for potential challenges but also increases the loan officer’s visibility and potential client base.

During times of market downturns, it is crucial for loan officers and realtors to maintain a positive outlook. Despite the challenges, they should channel their inner superheroes and overcome obstacles. Just like superheroes save the universe, loan officers and realtors can ensure their businesses stay on track even in the face of a credit crunch.