Many financial institutions in this nation are required to maintain "reserves" in order to hold onto certain credit ratings that are a requirement of doing business within the financial sector. The requirements vary depending the the type of business being conducted. Mortgage brokers for instance are required to hold a $100,000.00 bond in order to legally stay in business.

In the same way Wholesale lender, Hedge Funds, Banks, and Broker - Dealers are required to maintain a certain level of reserves to legally conduct business. If those reserves dip too low a financial institution may lose their credit rating and with it their right to continue doing business.

We are currently in the midst of a "credit crunch". The term "credit crunch" has been used a lot in conjunction with descriptions of how our economy is suffering and how it is much more difficult to obtain financing all around but especially in the housing sector.

With all of the jargon being tossed around I haven't seen anyone really talking about the issue or what is causing this "credit crunch". I mentioned above that financial institutions are required to maintain a certain reserve to stay in business.

Here's what's happening; At the same time as these financial institutions are struggling to maintain their reserves due to lack of new business (profits) they are also losing a whole lot of money on souring bets. Most specifically relevant to the purpose of this blog; many wholesale mortgage lenders are losing money hand over fist. Many wholesale lenders are in a position in where they have to buy back billions of dollars in souring mortgage debt that they sold to investors with contingencies attached and they are losing billions of dollars on mortgage that they are holding in their own line or portfolio.

As a result lender's really are trying not to do loan. There was a joke going around for a little while that certain wholesale lenders "don't want the loan"... Well that is proving to be true. Banks and wholesale lenders are tightening their guidelines to the extent that it is much more difficult to obtain financing; most specifically real estate financing.

The reason is simple; these companies as I mentioned above are required to maintain a certain level of reserve. Many of them are in the process of trying to raise capital in order to stay in business and really cannot afford to make "too many" new loans. They are trying to hold onto their money and maintain their reserves otherwise they will  Implode.