Thursday, December 31, 2009

Drying up of Credit lines.

In this economy when you really need the money and you can tap into your home equity lines of credit, the banks are refusing to extend or give lines of credit since they believe that the homes will be worth less than what they have assessed or the prices of the houses will come down by the time the lines of credit are approved.

I have read stories about people whose lines of credit were approved but right in the middle of them renovating their houses, their lines we cut out because the bank believes that the house prices have dropped.

It is one extreme measure of what is happening to the credit market. On the one extreme in the previous years, credit lines were extended way too much and there was almost no check as long as the banks believe that the home prices are rising. But now after the collapse of the housing market, the banks have switched on the other side of the spectrum and have curtailed all sorts of credit but especially home equity lines of credit.

Being overly reckless and now overly cautious are the two extremes that the banks are implementing and they don’t seem to get a grasp of what they should be doing in terms of lending out. They should be working towards the middle but they don’t know what the middle is. It is a tragedy and it will keep on cramping the economy unless a kind of balance between the income and credit has been established.

On top of this the government encourages the banks to give out loans and on the other hand guide the banks to check every kind of collateral before giving out money. Everybody right now is in a state of confusion and caution which will have to end if we want the economy to move forward from this state of paralysis.

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