MAIN PROBLEMS OF US ECONOMY BEFORE RECESSION:
- National debt of $10,000 billion (68% GDP)
- Account deficit- $857 billion (6.5% GDP)
- Housing Market- house prices decline up to 30%
- Devalue of American dollar- loss of confidence in American economy
- Extreme credit crunch- loss of confidence in American banks/finance sector (bad loans/mortgages)
- Cost push inflation- squeezing incomes and reducing disposable incomes
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| The US current account deficit decline |
SUBPRIME MORTGAGE CRISIS-
"THE LEADING FACTOR IN THE US RECESSION"
The subprime mortgage crisis put the U.S. economy into the worst recession since the Great Depression.
Definition: Lending at a higher rate than the prime rate to borrowers that are unable to be granted regular loans or mortgages (because of a poor credit rating or high debt load) use subprime loans to access credit.
Subprime lending can be just as high-risk for the loaners as well as the borrowers as it consists of high interest rates and usually poor credit scores and credit history, subprime car loans and credit cards further jeopardize the borrower. Often, subprime loans lead to default, seizure of collateral, and mortgage foreclosure.
Prior to 2006-06, lenders were competing with one another to gain a larger sum of the mortgage market in the US, therefore becoming very careless in lending requirements and offered low introductory mortgage rates to gain real estate buyers' business. Many of these buyers would have never been able to qualify for a mortgage, so they took advantage of the situation and entered the real estate market completely unable to afford doing so. This led to a housing bubble. The "low introductory mortgage rates" soon converted back to normal market interest rates as demand for houses increased, and many of these new home-buyers could not maintain the higher mortgage payments. Mortgage foreclosure was inevitable. This led to a credit crunch. Many of the borrowers have defaulted their loans, filed for bankruptcy and are in mortgage foreclosure.
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Impact of the subprime mortgage crisis from the homeowner up to the government and central banks. |
