Posted by Patrick Gannon :: September 1, 2007 @ 7:15 am

The credit crunch is just getting started. How long it will last and how big it will be in the final tally is anyone’s guess, but my personal forecast is: “a while” and “really big”. There will be first-order and second-order effects that the economy will need to handle.

The first order effects will be those affecting hedge funds and banks that are facing degrees of financial crises. Several hedge funds have gone under this month. Banks are beginning to shed departments which have been originating subprime debt into the secondary markets. Mortgage companies, both big and small, are laying off employees and in some cases shutting down. Investors in those funds and in those particular financial services companies will lose some portion of their investments. Some analysts are even worried about money market funds’ exposure to subprime – albeit at a level capped by the SEC at 5% of their assets.

Second order effects will be more pervasive, and could last a lot longer. Homeowners seeking new mortgages on their properties are running into tough new underwriting criteria. Jumbo and Super-jumbo loans are much harder to qualify for. Creditworthy borrowers are still able to get loans, but the rates are going up as banks are forced to keep the loans on their books for a longer period of time than they have done recently. Subprime borrowers will get a very high interest rate quote from lenders, if they even qualify for a mortgage. Many of the “clever” innovations in the mortgage industry, like Alt-A mortgages and 100% financing, seem to be a thing of the past.

Then there is another set of borrowers: people with Adjustable Rate Mortgages whose loans are resetting beginning this fall. According to analysis by Banc of America Securities, there are upwards of $295BB of other-than-subprime Adjustable Rate Mortgages resetting by the end of 2008. These resets are likely to lead to higher house payments, lower cash flow for homeowners, and let’s not forget higher prices on home equity lines of credit. In short, there will be a cash crunch because of the credit crunch.

What are people who need affordable credit supposed to do? We believe that Lending Club presents a great alternative for both borrowers and lenders. When the banks tighten, and the traditional credit providers dry up or raise rates to untenable levels, credit worthy people still need credit.

At Lending Club, we believe that now is the right time for people to come together. Even with concerns about subprime, there are millions of potential borrowers with good credit histories who need loans, and there is a big opportunity for people to become lenders and serve borrowers’ responsible credit needs fairly and profitably.

Better Rates. Together.