What caused the Recession?
America’s subprime mortgage crash late in 2007 has impacted across the world and caused a recession in the US. Financial doom and gloom is spreading.
Lenders gave subprime mortgages to people with bad credit, who could only qualify for mortgages with high credit rates. The flow on effect has been to those borrowers with good credit ratings and secure incomes who qualified for home loans with lower interest rates. The problem with the loans that went to the good credit risks were their assets and income did not have to be documented and their loans had variable interest rates. When these rates readjusted to higher interest rates, people just did not have the extra money to meet the higher payments.
Subprime Mortgage Fallout is felt across the World
It was an incredibly profitable time for all – well, there was the illusion of profitability. Houses were selling quickly at higher and higher prices. People that were never before able to get a mortgage bought houses for the first time. The great American dream to own your own home came true for many but it was all just an illusion. An elaborate plan for some greedy organizations to make a lot of money from people just trying to buy a home. They lent money to just about anyone – never mind whether they could pay it back or not.
Then it became a roundabout – house prices rose so borrowers borrowed more, getting higher and higher mortgages. All 
this is big money for the subprime lenders, investors and insurance companies.
It all came tumbling down when the variable rates became so variable that too many people could not meet their mortgage payments. So many defaults and assets returning to the lenders caused subprime lenders a liquidity problem. Loans backed with security became more risky and subprime mortgage lenders got into trouble. The insurers who insured these loans then felt the effect when the insurance was called on and got into trouble as well. It became like a house of cards and the flow on affected eventually affected the economy.
It was a great idea and gave so many people joy and lots of money. The problem has become that the bubble burst and so many people are trying to keep their finances on track. The year 2008 will be remembered for the fallout from the subprime mortgage crisis of 2007 and, hopefully, everyone will remember the hard lessons learned.
It is not just governments and financial intuitions that need to learn the lessons, it is the borrower. The borrower who dreams of a better life but does not have the money to finance it. There is nothing wrong with dreaming, but if you have to go too far into debt to reach it – ask yourself – is it really worth it?
Tags: incomes, recession, subprime lenders, subprime mortgages, subprime mortgage lenders