In the United States, loans are classified into prime and subprime loans according to the borrowers' credit. The interest rate of subprime mortgage is higher than that of prime mortgage as subprime mortgages have a much higher rate of default.
The reason for the subprime mortgage crisis was the bursting of the housing bubble. The creation of the bubble was directly linked to the consumption culture of the United States, unreasonable housing policies and loose currency policies over the long term.
The U.S. economy is characterized by high indebtedness and low savings as Americans are used to borrowing to consume and the nation also encourages borrowing and excessive consumption.
To prevent the U.S. economy from falling into recession, the Federal Reserve once pursued expanding currency policy for a long time.
From January 2001 to June 2003, the Fed lowered its rates 13 consecutive times, decreasing the interest rate from 6.5 percent to 1 percent, a historic low. The expansion of currency and the low interest rate reduced borrowing costs and encouraged U.S. residents to invest in housing.
Optimistic estimations of a continuous rise in housing prices encouraged the banks, eager to get higher interest earnings, to extend housing credit to more consumers with very low credit.
The above-mentioned reasons caused the subprime mortgage market to develop fast, leading the bubble to expand rapidly.
In 2006, the U.S. housing bubble began to burst.
Within two years, the Fed increased its interest rate 17 times, lifting it from 1 percent to 5.25 percent, putting great pressure on borrowers.
From the second quarter of 2006, the housing market began to cool down with prices starting to drop in many parts of the United States. Borrowers found it difficult to sell houses or refinance through mortgage.
Large numbers of subprime mortgage clients were unable to repay their loans in time and foreclosures accelerated in the United States in late 2006, triggering a global financial crisis through 2007 and 2008.
On April 2, 2007, the second biggest subprime mortgage lender in the United States, New Century Financial Corporation, filed petitions for bankruptcy protection. Some other financial institutions providing subprime credit were also facing financial crisis. The subprime mortgage crisis emerged, leading to violent turbulence in the U.S. stock market.
Furthermore, a large number of lending institutions, with the help of agencies, transformed large amounts of subprime mortgage credit to securities and sold them to investment institutions. The investment institutions then developed the securities into various derivatives and sold them to hedge funds or insurance companies.
According to the National Bureau of Economic Research, U.S. subprime mortgages had reached 1.5 trillion dollars and some 2 trillion securities were issued on the basis of the mortgage, leading to over 1 trillion Collateralized Debt Obligation and billions of dollars of credit default swaps.
However, in the so-called innovation of financial products, the U.S. government has failed to strengthen supervision and financial operations increasingly lack transparency.
The subprime mortgage crisis in the United States finally became a financial crisis affecting the whole world, posing great danger to the global economy.
Source:Xinhua
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