Effects Of The Mortgage Crisis
It was a time when realty sector was on the boom in the US. Everyone was running towards this sector. Loans were available for everyone and acquiring a property became a cakewalk. Subprime lending was rampant. People with no credit or even bad credit could easily get loans for the mortgage from the sub-prime lenders. This meant that there was a category of homeowners getting created who did not possess a sound financial status to be able to repay the home loan amount.
Slowly but steadily borrowers started to default on the loan repayments. With the rise in the interest rates, their monthly installment grew and they were unable to pay their loan commitments. Number of defaulters began rising and foreclosures grew by huge numbers. Banks and lenders took over the property from the hands of the borrowers and tried to recover their loan amount by selling the acquired property. However, by that time the property market fell down completely with more sellers than buyers for the foreclosed property.
People lost their life savings into the foreclosures. This impacted the entire realty industry leading to the mortgage crisis. Banks and the mortgage lenders had to face serious liquidity crunch in the wake of the mortgage crisis. This impacted the prices of the property. With no buyers for them, the prices plummeted to the lowest levels. Banks and lenders had to lower the interest rates on the mortgage in order to attract customers.
Mortgage crisis resulted in a series of lending reforms which made the lending norms tough for the banks and the lenders in the view of the huge losses they incurred.
Impact of the mortgage crisis:
Financial markets across the globe could feel the tremors of the mortgage crisis in the US. Equity markets witnessed decline in sales which resulted in heavy losses to the investors. Investors both institutions and the small ones, moved out of the equity market and moved their investments to the government bonds and securities. This further resulted in the closure of many industries across the world and led to wide scale unemployment. A series of events had their roots in the mortgage crisis.
Let us look at some of the reasons of the mortgage crisis:
- Around 30% of the overall lending’s in the realty sector included high risk loans. The borrowers were unable to hold the increase in the interest rate of the loan and immediately went off to sell the property. This set another action which was a further increase in the interest rates by banks in order to stop the sale of the property.
- Escalation in the property market was on account of the investments and not by purchases by the end users. Thus a declining market saw most of the investors turning into sellers and even at discounts to save their investments.
- Mortgage frauds further deteriorated the condition and there were severe losses to all the borrowers and lenders.
Mortgage crisis took very long time to recover. This was due to the fact that borrowers were out in the market looking out for buyers in order to recover their investments. Banks and lenders who had taken properties as a result of foreclosures were simultaneously out in the market looking out for buyers. The mortgage crisis resulted in stricter lending norms and buyers found it tough to get the loans.
Thus the overall property turned topsy turvy with more sellers and very less to almost negligible buyers. This situation could not improve till the Federal government came out with a bailout package for the industry.