In the past month, financial markets throughout the country and around the world have been upset by fears of spreading credit problems, namely subprime home mortgages. Investors worrying that the problems will affect the U.S. economy as a whole have caused stocks on the New York Stock Exchange and elsewhere to widely fluctuate.
Subprime mortgages are made to borrowers who do not qualify for the lowest market interest rates because of their credit history. Subprime lending is riskier for both lenders and borrowers because of a combination of high interest rates and poor credit history.
Irresponsible lenders, Zoe Erdman, senior credit officer for the Merchant's Bank's 36 branches in Vermont, said many non-bank mortgage lenders and big national banks through subsidiary mortgage companies had been irresponsible, offering ill-advised loans to people looking to purchase a home.
"The rules were relaxed, the underlying guidelines were relaxed," she said. "In a lot of instances you didn't have to show what kind of income you had. It's a nationwide problem and the loans have started to go bad. It has scared investors and it's a snowball effect."
Those loans are the cause of the current credit crunch, said Erdman.
"It's been fueled by the problems in the subprime mortgage market where a lot of borrowers were given loans that weren't in their best interest," said Erdman. "People aren't paying. Nationwide, foreclosures are up significantly."
As a result, nervous lenders have tightened their credit standards, making it more difficult for individuals and companies to find financing.
But Bennington County Industrial Corp. Executive Director Peter Odierna said the tightening of credit lines has not been a hinderance to business in the county.
"Here in Bennington County, based on what I see and based on commercial vendors in the area, it's having little if any impact on the ability to conduct business," said Odierna.
Housing sales have also stayed constant.
Kathy Hoisington, owner of Hoisington Realty in Bennington, said real estate agents have not seen a local slump in housing sales because of the credit crunch.
"We don't see that as a problem yet. It is true — it is being reported — that because of the subprime (mortgage) market, lenders were granting mortgages to some people who couldn't afford it," said Hoisington. "The Northeast has not been as affected by the problem because our customers tend to be more fiscally conservative here in New England. A lot of people here took sensible mortgages to begin with."
Other Realtors, such as Milt Surdam, co-owner of LM Realty in Bennington, also said they are not experiencing any decline in home sales in the area.
Erdman said most banks in Vermont did not offer subprime mortgages. In contrast, non-bank mortgage lenders, which have increased in Vermont over the past several years, have, she said.
"We never relaxed our mortgages. We offer bread and butter mortgages, and that's true for most small banks," Erdman said. "I think that Vermont did have a number of non-bank mortgage lenders here. They've proliferated here and a lot of them are going out of business."
Hoisington said people looking to purchase a home in the area have not been turned down for mortgages, but lenders are looking to offer more traditional mortgages that require a down payment.
Fingers crossed.
"I haven't had a mortgage turned down on a sensibly qualified buyer. We're crossing our fingers that it's going to be a problem for states like Florida and not here in Bennington," said Hoisington.
People are still purchasing homes, even though they are hearing through various media outlets that the market has hit a snag, said Hoisington.
"People think, 'Oh my god, the market's collapsed.' And that becomes a reality. That's what we're hoping will not happen," she said.
Erdman said the market will be able to correct itself but it will require lending institutions and borrowers to act more responsibly.
"The fix for it is for institutions to lend money responsibly and for borrowers to find a home they can afford. It's actually really simple," said Erdman.
Odierna said the credit crunch could even have a positive effect in the long term.
"The one piece of collateral damage that might have an impact is actually positive," he said. "What we've seen is that interest rates have actually come down. The one possible benefit going forward is that people and companies looking to borrow money could find it easier to find capital."