Effects of the Mortgage Crisis

February 6th, 2008 | by admin |

The Mortgage crisis is mainly focused on the US, where mortgage defaults are rising very rapidly. The US mortgage crisis is affecting the UK to a lesser extent; but in an era of global credit flows, it is hard for any country to avoid the impact of large financial losses resulting from mortgage defaults in the US.

Main Effects of the Mortgage Meltdown

  1. Many medium sized and large Mortgage lenders in the US went bankrupt - in particular, lenders who specialised in subprime lending (mortgages to those with poor credit histories)
  2. Banks who lent to the mortgage lenders made spectacular losses. This affected financial institutions who didn’t make any mortgage lending directly.
  3. Banks are much less willing to lend for mortgages and buy bundles of mortgage debt. This has led to shortfalls of credit in mortgage markets.
  4. Interest rates on interbank lending have increased due to the increased concerns over mortgage defaults.
  5. More difficult and expensive for potential mortgage borrowers to secure a mortgage deal. This is particular a problem for the ’subprime’ sector of the market. Whearas in the past people could get 100% mortgages on bad credit, this is no longer possible.
  6. Fall in House Prices. Because less people can get a mortgage the demand for new housing is falling, resulting in lower house prices. House prices are also falling as a direct result of rising mortgage defaults.
  7. Lower Economic Growth / Recession. These lower prices and falls in wealth are contributing to falls in consumer confidence and economic growth. There are fears that the lower house prices could cause a recession in the US; it is not an impossibility in the UK.

The Good News of the Mortgage Crisis

  • In response to falling house prices Central Banks are likely to lower interest rates (as the Fed has already done), making mortgage payments more affordable.

The Bad News of the Mortgage Crisis - There is more to come

  • Unfortunately, the worst of the mortgage crisis may still be to come. There are still many homeowners who will soon becoming to the end of their introductory mortgage deals. They will then face a sharp increase in mortgage payments.
  • House Prices may continue to falling as they readjust to long term ratios of price / income ratios.

10 Mortgage tips for saving money featured at Carnival of personal finance

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