GLOBAL FINANCIAL CRISIS
In the year of 2008, the entire economy is facing up what has been called the worst financial crisis since the Great Depression which is the sub-prime mortgage crisis. This crisis began with the collapse of United States sub-prime mortgage and the reversal of the housing boom. As of March 2007,the value of U.S. subprime mortgages was estimated at $1.3 trillion, with over 7.5 million first-lien subprime mortgages outstanding. Approximately 16% of subprime loans with adjustable rate mortgages (ARM) were 90-days delinquent or in foreclosure proceedings as of October 2007, roughly triple the rate of 2005. By January 2008, the delinquency rate had risen to 21% and by May 2008 it was 25%. The U.S. mortgage market is estimated at $12 trillion with approximately 9.2% of loans either delinquent or in foreclosure through August 2008. Subprime ARMs only represent 6.8% of the loans outstanding in the US, yet they represent 43.0% of the foreclosures started during the third quarter of 2007. During 2007, nearly 1.3 million properties were subject to foreclosure filings, up 79% versus 2006.
This ongoing increase in foreclosure risk occurred when mortgage industry pushed loans with more generous terms in order to extend home ownership rates which was stagnant in year 1990 or to make home-buying more affordable. It has an adjustable interest rate called a “2/28” that features semi-annual interest rate adjustments after a two-year fixed-rate period which is often a discounted or “teaser” rate, so the rate adjustment can lead to a significantly higher payment. Because of the resulting payment shock, these loans are sometimes referred to as “exploding ARMs.” This allows the homeowner to pay just the interest (not principal) during ...