The Banks will provide a loan only if the security provided is worth more then the loan itself. This is a basic law.
As such, if property values fall, banks will call in the loans. Yes, it has happened in Canada about 20 years ago and in other places too.
The current credit crisis is exactly this. The banks have loaned out money against security, property, which is not worth as much as the loan. This is what the sub-prime crisis is all about.
People are trying to sell their properties and there are no buyers. Therefore, strictly speaking, the value of the property has gone down lower then the loan. Since there is no liquidity in the market, the prices are artificially holding because there is no transaction.
In US, banks are not calling in the difference yet. But they have a liquidity crunch in return. If depositors lose faith in banks knowing that they have questionable loans on the books, the banks will not be able to come up with cash and collapse.
The rot has gone in to such an extent that the Banks are not loanning money to each other either this is the simple explanation of LIBOR crisis and the credit freeze.
The Banks will provide a loan only if the security provided is worth more then the loan itself. This is a basic law.
As such, if property values fall, banks will call in the loans. Yes, it has happened in Canada about 20 years ago and in other places too.
The current credit crisis is exactly this. The banks have loaned out money against security, property, which is not worth as much as the loan. This is what the sub-prime crisis is all about.
People are trying to sell their properties and there are no buyers. Therefore, strictly speaking, the value of the property has gone down lower then the loan. Since there is no liquidity in the market, the prices are artificially holding because there is no transaction.
In US, banks are not calling in the difference yet. But they have a liquidity crunch in return. If depositors lose faith in banks knowing that they have questionable loans on the books, the banks will not be able to come up with cash and collapse.
The rot has gone in to such an extent that the Banks are not loanning money to each other either this is the simple explanation of LIBOR crisis and the credit freeze.