We all know by now what the North American markets are struggling with the Subprime Mortgage crisis. Mortgages given in a cut-throat competitive market are coming back to haunt the debt, stock and forex markets.

The housing market was already in doldrums from last year. The spectacular growth rate of real estate prices seen from 2001-2005 slowed down considerably. New homes' growth rate was falling and the total inventory of homes on the market was on the rise. This decelerated the growth rate of prices. In a few months, we might see the average home price in the US actually decreasing.

In July and early August it was as though funds had suddenly dried up. Interbank lending was at the minimum and the Fed had to announce the availability of liquidity. The liquidity crisis also influenced the Mergers and Acquisitions (M&A) and Private Equity markets. Geographically it spread not only to the close trading partner Canada but also countries as far off as Australia and France.

As if it were not bad enough that there is a serious lack of liquidity in the system, the worse news is that these risky mortgages are now in individual investor's portfolios through mutual funds. Banks used to wrap up these mortgages and sell them to third parties. Such wrapped-up mortgages were bought by mutual fund and hedge fund managers to diversify their risk. Individual investors will be most affected if we see large-scale defaults in the coming months.

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