The US economy has been facing financial crisis since 2006. This has transformed into a global phenomenon after July 2007. There is a sharp rise of foreclosures in the mortgage market. This has resulted in the decline of the property values.
The borrowers were unable to pay their monthly installments because of the rising interest rates and the lenders were unable to recover their debts.
This has increased the delinquencies and foreclosures by the mortgage companies.
A report on the existing home sales released on September 5, 2007, said that the number of Americans buying existing houses had dropped by its largest amount since 2001. Before learning about this crisis, let us know the background that led to this situation.
It is a general term which refers to the practice of lending loans to the borrowers who do not qualify for credit either due to their poor credit history or murky financial situations. It is offered at a higher rate of interest than the usual loans as there is an increased risk of repayment. Half of the lenders do not demand no documentation of the borrower's income. Half of the loans are written off by the companies that are almost entirely unregulated.
It is a risky job both for the payers and the creditors because the borrowers do not have enough income to support the monthly payment.
As the subprime mortgage backed securities were collateralized, this created a vicious circle, when subprime loan payers were defaulted on their obligation, leaving foreclosure of their mortgages. When some of the homeowners with mortgages failed to meet their financial obligations, they put up their homes for sale. This dragged down the price of other houses in their neighborhood, though not merely those with subprime mortgages.
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