At first glance there is little to link the Bank of England with foreclosures in the United States. After all American real estate (and the state it is in) should have little enough to do with one of the world’s oldest banks across the big pond.
And yet, the truth is that the ‘first glance’ is deceptive. Foreclosures are a fact that depends on a simple premise: credit, or rather the lack of it. The latest Bank of England report on the financial crisis we are facing gives a stern warning concerning the potential shrinking of credit, the overexposure of UK investment institutions in the US real estate sub-prime mortgage market and the very distinct possibility that we are heading for a severe credit crunch.
Until recently the Bank of England had held silent on the matter so the warning it has now issued is not to be taken lightly. Essentially the report highlights the fact that the overexposure of UK financial institutions in the US market may lead to a drop in profits as they take a hit, which will lead to a toughening up of available credit for commercial organizations as well as private clients which will lead to a shrinking of the economy in terms of a reduction in growth which may suddenly start a recession.
This is bad news indeed. In terms of real estate this is what will happen: There will be an increase in foreclosures as more and more mortgage holders find they can no longer make payments due to the fact that they have lost their jobs or can no longer access the kind of credit they need to keep afloat due to tougher lending practices. Lenders will move to recoup their costs faster, which means that rather than risking house prices dropping and their exposure in terms of properties they have foreclosed on, increasing they will move to foreclose early and sell as soon as possible.
This is indeed what is happening already in some parts of the country where lenders feel they have been overexposed and are now looking to minimize the risk. In other parts however, as well as in the United Kingdom, this has not happened which might mean that it is still possible it will not happen at all and all we will experience is a gentle correction of real estate prices across the world, rather than a bubble bursting and prices collapsing.
The Bank of England warning, at the moment, is just that, a warning. But not heeding it and preparing for the worst while hoping for the best can be foolhardy.
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