Abstract: In this paper we will discuss the subprime mortgage crisis of US in 2007. We will try to find out the reason behind it and also the aftermath.
The US Subprime Mortgage Crisis upset the world financial markets. The economy of the United States of America was efficient enough to combat the mortgage foreclosures. The global investors feared the fact that subprime mortgage crisis is a symptom of some unknown problems in the economy of US.
In Jackson and Mississippi, 22% of all subprime loan payments (in 2006) were in arrears for sixty days or more. In Detroit and Boston that figure was 24.6% and 15%, and in California it was 14%. In many counties, like Ohio, Cuyahoga, the number of foreclosures were more than 13,000.
In 1994, less than 5% of total mortgages were subprime in US. But within 2005, that figure went up to 20%. The sudden changes in the banking system was mainly the reason behind it. Earlier, mainly the commercial banks were used to serve the American communities and they offered fixed rate mortgages.
In 2005, the rates of interest began to increase after a long time stable and slowly decreasing trend. Therefore, demand for home came down which also brought down the prices.
The mortgage finance companies and the mortgage brokers were competing with the traditional banks to offer some new products. Therefore, the on growing competition produced several mortgage products and choices, such as subprime loans of different varieties for the consumers.
Moreover, a number of home owners with subprime mortgages were stuck both ways. They were neither able to combat the increases in payment nor sell their homes by reason of price depreciation in the market. In some big cities, like California, almost 77% homes were overvalued.