Subprime Crisis

Subprime Crisis

Introduction

The call of the Subprime crisis or subprime mortgages happen in the United States since 2007 and have intensified. In recent years, with the rising prices of real estate in the United States and the high liquidity in international markets, banks and financial U.S. began to lend more money to people with bad credit history considered bought homes. Before, only had access to these mortgages, lenders with good payment history of loans and proven income.

In addition to mortgages have higher risk due to the profile of borrowers, banks also began to make non-traditional loans with lower interest rates in the early years of the initial contract and benefits only the payment of interest (Leonhard, 2012). How Subprime loans, for people with a history of default, embed higher risk, they have higher interest rates, which makes them more attractive to fund managers and banks in search of better returns.

These managers, so when purchasing such securities from institutions that made ??the first loan, allow a new amount of money to be borrowed again, even before the first loan to be paid. Also interested in profit, a second manager can buy the title acquired by the first, and so on, creating a chain to sell securities. However, if the tip (the policyholder) cannot pay its debt early, he begins a cycle of non-receipt by the buyers of the securities

The whole market is replaced by fear and buys Subprime lending, which ends up generating a liquidity crisis, i.e. a credit crunch in the economy. After reaching a peak in 2006, real estate prices, however, began to fall: the Fed's interest, which had been rising since 2004, makes credit and buyers away (Ding, et al. 2010).

With this, the supply begins to exceed demand and since then what we saw was a downward spiral in property values. With high interest rates, default rates increased and the fear of new loan defaults did suffer a significant slowdown in the country as a whole, the world's largest economy - less liquidity (available cash), less if buying less and companies profit fewer people are hired.

The Diagnosis of the Subprime Crisis

The so-called “subprime crisis” is a financial crisis sparked by excessive speculation on high-risk assets that were financed by bank loans. In fact, subprime loans (including mortgage loans for the purchase of residential houses and Car rentals and purchases via credit cards) are granted, many times, the borrowers (clients) without proof of income and without historical reputation of “good paying” (Leonhard, 2012). The Interest rates floating, i.e., are determined at the time of payment of debts. By this reason, with the rise of interest rates in the U.S., many borrowers were in default; this is unable to pay its debts with commercial banks which, in turn, entered bankrupt. The crisis of subprime mortgage securities U.S. has more complex characteristics of those simplistic explanations that link only “fault” system governance Financial. In fact, it can be said that neither the idea of excess liquidity as a ...