GLOBAL FINANCIAL CRISIS Essay Example | Topics and Well Written Essays - 1250 words

orbicular FINANCIAL CRISIS - Essay ExampleIt started when the US sub-prime mortgage merchandise collapsed due to the default on payments. A sub-Prime mortgage is a loan made for homes to borrowers who atomic number 18 non eligible for prime home loans because they all do not have sound credit history or have non at all. For example, throng with low incomes, low bank transactions, history of defaults or unemployment, can use these mortgage loans to purchase homes. These loans are generally given out by lenders on higher interest rates, additional fees, penalties for early joy of the loan and other additional costs much(prenominal) as adjustable interest rates (ARM). With such instruments where the borrowers do not have a credit history for the borrowers to base heir decisions on, there is a high risk of default. What was once known as the header and a strong entity of the economy in 2007, the real estate business took a complete nosedive, which was not expected as the values of houses had not declined since World War 2 and were on a continuous rise later the salient depression, and thus, lead to the liquidity crunch in the US market. The mortgage taken by investors had real estate as collateral which eventually lost all its value and hence defaults on payments occurred.The demand for houses increased withal during 2001 because the federal government reduced the interest rates, it was the lowest in 2001. This allowed people to invest in to a greater extent houses and people started buying vacation houses and second homes. The builders continued building more and more houses even after the demand for property started to decrease after a while. The property market became so overvalued that finally the market collapsed, resulting in a rapid decrease in the rates properties and property demands. (University of Iowa, 2008)Many Credit rank agencies also played a major role in the event. The Mortgage backed securities which were in great demand in the early 2002, continued with the increasing demand and although