Though there have been numerous theories suggested as to the causes of the recent credit crunch in the global markets, many people agree that the main cause of these economic developments was the subprime mortgage crisis that unfolded in the United States in 2007. However, many people remain unaware exactly what this ongoing crisis entails.
Increases in house prices in the United States since the last economic recession led lenders to make higher-risk loans, such as to people with low credit ratings or low incomes. Such activity is referred to as subprime lending. On the other side, borrowers were encouraged to take on mortgages, both by the trend of rising house prices but also by the incentives being offered by the lenders. So keen were the mortgage lenders to grant such loans to people that they essentially borrowed money themselves to be able to lend people the money. Such loans were made and taken based on the mistaken premise that the upward trend would continue. When the positive trend did not continue, individuals and the global markets were thrown into a serious financial crisis.
As a result of inflation, 2007 saw an increase in interest rates, which meant mortgage payments increased as well. In cases where the loan had been made inappropriately, and where the lender had taken a significant risk, such people struggled to repay their debts. This was further compounded by the fact that for many borrowers the two-year low interest introductory period granted on many mortgages was expiring, making it even more costly. An increase in people defaulting on their mortgage payments followed. The US housing boom was over, and house prices started to fall. Here the situation snowballed, as the fall in the housing market resulted in further mortgage problem ...