Monday, September 21, 2009

The Fuel That Fed The Subprime Meltdown

Article by: Srividya Srinivasan

The subprime mortgages crisis – the crisis that brought the global financial system down. Until the year 2006, the housing market in the United States was doing well. A home loan was considered “easy” to get so more and more people were buying houses. Since the housing demand was increasing, the return on the prices was also increasing. These prices attracted investors, who would buy these houses as investments to sell for a profit. Because the prices rose, the consequences from the “bad” loans given to individuals resulted in delays. Because houses were worth more, household owners would take out more mortgages against their house when they could not pay off their mortgage payments.

Despite the increase in house prices, the household income did not increase. So when the property value stopped increasing, there was no way to take out another mortgage against the house when payments could not be made. This caused the mortgage lending industry to finally start having people defaulting on their mortgage payments. By defaulting on their mortgage payments, the number of houses on the market also increased. Therefore, the real estate markets all started plummeting. With the increase in houses and lack of buyers, the house prices decreased. Mortgage companies out of business due to financial markets not wanting to buy risky mortgages - mortgage lenders declare bankruptcy. Central banks used emergency clauses to inject liquidity into the financial markets. Foreclosures rates start increasing rapidly.

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