The Subprime Mortgage Crisis (Credit Crunch)
Undoubtably the biggest economic issue to affect some of the worlds leading nations in the past twelve months is the subprime credit crunch. This issue along with rising fuel prices and an increase in use of credit and cost of living expenses, has the major world economies of Britain the US and Australia alike on a down hill spiral towards a global recession.
The key element that makes this crisis such an important and widely covered subject by the media is the fact that it will most likely involve most of the population even people who do not have a current mortgage.
The US and British market
Over the past year in the US and Britain numerous mortgage lenders have declared bankruptcy and shut their doors, the mortgage market has become fearful of its future, as investor interest in mortgage backed securities area have lulled and costs of funding has increased. The US mortgage market is currently knee deep in a financial crisis that centres on the US property market. An overwhelming mixture of problems in the mortgage market is spilling over uncertainty and worry to various other credit markets including the stock exchange. As covered in Barnes (2008 p.1 of 7)
Some important questions that have been asked by the media and the world’s population are:
How did this problem all start?
What factors/actions contributed to this crisis?
The answers to these questions are vast and complicated, although the main reasons put forward by economists are:
· Inability of homeowners to make payments on their current mortgage.
· Poor Underwriting Judgement by lender and poor product from the consumer.
· Mortgage incentives developed by lenders such as short term teaser rates, which would later arise quite dramatically.
· Further decline on home prices.
Twelve months ago various mortgage companies in the US and Britain were lending amounts to borrowers that they could not afford repayments on....