The US subprime crisis has been building up over several years. Banks and mortgage lenders have been issuing too many high-risk home loans (called subprime loans), which is now causing havoc in the global financial system.
What Caused The Subprime Crisis?
Due to rising interest rates, falling property values and other macro-economic factors, some Americans are finding it impossible to keep up with their subprime mortgage repayments. This has caused wide-scale mortgage defaults, leading to home repossessions.
The problem is, these homes aren't worth as much as they once were. So the equity locked in the house is not enough to repay the original loan.
Disturbingly, these people were originally flagged as having poor credit histories, but that didn’t stop mortgage lenders from handing out massive loans to fuel the property boom.
To make things worse, these subprime mortgages were passed on by the banks in the guise of complex financial products, which were then re-sold to investment funds.
The result is that the banks and the general public is now exposed to this excess of "bad debt" – i.e. money that will never be paid back – through pension and investment funds. The situation is labeled the subprime crisis for originating from subprime loans.
The Effects of The US Subprime Crisis
Supbrime loans can be circulated in the financial system for a long time without being noticed. However, with banking institutions due to publish their annual accounts in coming months, the initial impact of the US subprime crisis will finally be clear.
It is unlikely that another Northern Rock episode will emerge, since it had an unusual business model that left it highly exposed to the credit markets. However, mass panic and media hype could scare bank customers into withdrawing their life savings.
A run on a bank can destroy it. Unless the government can step in to guarantee the customers savings – but that is not a viable solution on a large scale.
The Effects of The Credit Crunch
Another problem that consumers face is the difficulty of obtaining loans and mortgages. Banks are acutely aware of the potential subprime debt within the business and can’t afford any extra exposure.
Personal loan power will come down to having a spotless credit history.
Jonathan Correll, of the mortgage broker Hamptons International, was quoted in an interview with The Times: “Borrowers today have to make sure they are whiter than white. If you have so much as a wrinkle on your record the lenders will say no.”
It is therefore very important that consumers keep on top of credit cards, store cards, utility bills, mobile phone bills, loan and mortgage repayments. The loan provider will search individual records going back three years.
People with poor credit histories must now dig themselves out of an even deeper hole. It may still be possible for them to attain a loan, but the limit will be capped - and they will pay through the nose in interest.
If you found The Subprime Crisis interesting, you may also like:
Is The US Economy In Recession?
