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The last half of 2006 and the beginning of 2007 brought global panic. Foreclosure rates doubled, tens of mortgage lenders go bankrupt every week, and the global credit crash is still everyone’s concern, no matter what social class they are taking part in. the financial crisis centering the US housing market is spreading over to the credit market and into the domestic and global stock markets. Will this line of quick spreading crisis end? And if yes, when?
Who is to blame? Who was too greedy, to sleepy or not enough understanding? Today’s market is a byproduct of the market of the year 2001. The fear from global terrorism resulted by the attack at 11th September has roiled the already struggling and instable economy that came out of the tech bubble in the late 1990’.
In 2001 the Federal Reserve started cutting down rates extremely, at 1% by 2003, which act’s goal was to encourage borrowing and to expand money supply. This aim was supposed to spur investing and spending. The idea of spending was propagated all over and encouraged large spending and buying. Of course, the promises and continuous pushing had its result; in 2002 the economy began to expand steadily. Lower interest rates worked, improving economy and the new form of investment attracting more and more was the real estate business. The rates of fixed-rates mortgages were never that low and people found it attractive to get through them the access to cheap equities available. The real estate market started its flourishing period when the number of houses on the market increased and so did the grown in their prices. Banks sold their mortgages to investment companies to Wall Street investors, who then sold them to everyone willing to buy low price houses with supposing large profits.
These mortgage secured investments were supposed to be the catch of the century, but they were not. Everything was great and flowing until a breaking point. With new loan product offers like stated income, verified assets loans, no income, verified assets and finally no income, no assets loans made people get mortgage loans to pay off existing debts, getting in more debt, which they cannot handle. People became unable to pay off their first mortgages and the foreclosure number increased. There were too many houses to be sold on the market, having half the price as primary bought, leading to general money loss in the row of investors. The investment companies realized that while investing in AAA rated mortgages they were using wrong data to assess risk factors.
By now, a supposed risk free investment business, which was about mortgage secured investments, had the turn no one expected: instead of generating profit globally for a long period of time, it generated great financial crisis in a short time.