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Risky borrowing is making a comeback, but banks are on the side-line

March 1, 2020
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Risky borrowing is making a comeback, but banks are on the side-line

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Some years back, the financial system was almost in a state of collapse due to bad loans. Loans were given to prospective homeowners to secure a home; recovering these loans became problematic during that period, and these bad loans almost crippled the financial sector. It is sad to note that after more than a decade, the circumstances that led to this unfortunate situation are on the rise again.

Currently, there are lots of lenders who are willing to finance home projects for individuals at a flexible regulatory rate. Most individuals are jumping on these opportunities and taking advantage of the less rigorous borrowing privilege. Compared to traditional banks who make use of the very rigid and heavily regulated financial system in the administration and disbursement of loans, most individuals find the services of this new lenders to be much less stressful hence the substantial patronage. This set of financial activities is best described as shadow banking.

The shadow banking sector is not new to the United States financial market, as it is a critical player in the economy. The Shadow banking sector is also not a small player in the US financial system as it boasts of more than $15 trillion in assets. This is huge, as it is bigger than the economy of so many countries. It is also important to note that the shadow banking industry does not just cover mortgage and housing alone, it also includes so many other sectors that need loans such as, business loans, car loans, and even entrepreneurial loans.

One reason why the shadow banking loans have continued to thrive are the policies guarding traditional banks which have made getting loans from these conventional banks almost next to impossible. The activities of shadow banks have significantly increased over the years as traditional banks are under a very rigid lending policy which aims to protect their existence and also keep them in business. Registering banks lending policies has given room for a much larger operation for shadow banks as they are stepping up their game and it is a scary future for the financial sector as the activities of this shadow bankers are very risky. The actions of these shadow lenders are creating an unbalance in the financial sector, leaving it vulnerable to the instability of the financial market as there is no provision made to reduce or assist in situations where they might suffer some loss.

There are lots of organizations that are into shadow banking, and the competition is very tough, this gives the borrower the luxury of choosing from a pool of interested lenders which is vice versa in a traditional bank setting. It is also important to note that these organizations are taking advantage of the internet, and one can make an actual request for a loan and get lots of feedback from organizations willing to lend money. Normally, borrowing involves individuals visiting the bank and applying for a loan, and the bank selects individuals it feels meet the stipulated criteria and then assesses the ability of such individuals to pay back before lending them. In the case of the shadow banks, it seems to be the opposite whereby they apply, and the individual selects.

Most of the shadow banks claim they have rules and regulations guiding them as well as several government organizations such as the Consumer Financial Protection Bureau. Also, they claim various states regulate them and that their activities are similar to government-sponsored entities that seek to lend to people properly and responsibly, just like the government-sponsored organizations like Fannie Mae and Freddie Mac.

It should be noted that the government needs to step up and develop proper regulations for shadow bank operators to avoid financial instability within the financial market. If you are wondering how to properly finance your investment in the Colorado real estate market, you can contact Top Tier Real Estate at (719) 330-5556.

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nicole@toptierrealestateco.com

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