decreased. Therefore, when the building led to over-supply of housing properties, the housing prices started to decrease after the peak in mid-2007. Even worse, the US Federal Reserve raised the interest rates from the 50-year low 1% to the current level of 5.25% , and higher interest rates forced the housing prices to plunge even deeper.
The fact that the housing price went down contributed to a much more difficult refinancing. The number of foreclosures and defaults increased considerably as ARM rates adjusted upward after the interest rates increase. In 2007, almost 1.3 million U.S. housing properties were put through foreclosure activity, 79% more than 2006 foreclose activities . Increasing number of foreclosures led to more supply of housing properties, and for that reason, the housing price decreased even more.
The abrupt crisis practically affects everyone in the economy, although mortgage lenders that retained credit risk were the first to be affected since the number of borrowers that default their loans increased. By using securitization, many mortgage lenders were able to transfer their rights of the mortgage payments to third-party investors with mortgage-backed securities (MBS) or collateralized debt obligations (CDO). As of May 19, 2008, the total of subprime-related losses, write-downs, and reserves set aside for bad loans combined is $379 billion since the beginning of 2007 . This includes at least 100 mortgage companies that have either gone bankrupt, suspended their operations or been sold since 2007, and more than 34,000 employees being laid off by financial institutions from July 2007 to March 2008 . Apparently the job cuts did not stop here as some financial institutions announced that more employees will be laid off. In April, Citigroup declared that a further 9,000 layoffs until the end of 2008 , and Merrill Lynch also announced that it planned to terminate 2,900 jobs by the end of 2008 . Within the same month, Wachovia slashed 500...