Mortgage Crisis in 2007

Property prices tumbled during 2007 because of the US sub-prime mortgage crisis. This had in turn affected US economy to slowdown and banks to loose billions. The crisis was due to the fundamental changes in funding strategy of mortgages. In normal practice, banks by using customer deposits financed mortgage lending. This practice limited the possibility of mortgage lending amount. But when Banks adopted a strategy to sell mortgages to bond markets in order to finance their additional borrowing, this practice had also faced criticism as there was no incentive to check mortgages issues.

Sub prime lending method, which was initially rooted in inner city areas, had spread over US rapidly in 2007. There has been a great demand from recent immigrants who tried to purchase housing property in well known housing markets such as Arizona, Devada, Southern California, New York City and suburbs of Washington DC. With high housing prices, it had become very difficult to own and occupy a residence without physically moving to the edge of the metropolitan area. However, as they were considered as 'balloon mortgages' they had high repossession rates compared to conventional mortgages. Initially, the payments were made for a two year term followed by variable and higher payments. As these mortgages had reset to a higher rate, as a consequence, repossession of the properties forced around two million families to leave their homes with their cases filed through the courts. Though, the administration had pressed industry for renegotiation instead of repossession, mortgage companies faced a lot of cases. The repossession wave had a great effect on housing prices, reverse housing boom and had caused decline in housing prices.

Around 4 million homes left unsold which depressed the prices with pressure mounting on builders to reduce the prices of the unsold properties. Housing prices that were falling at 4.5% annually during 2006 had fallen by another 10% during 2007 and areas such as Florida and California faced biggest boom in mortgage industry. The property issues had also affected the economy of building industry which was forced to halve its output for the fear of losing millions of jobs. With large firms suffering big losses, many small builders were thrown out of business. Property market slow down had also hit other industries as 15% of US economy was shared by the building industry. For instance, durable goods manufacturers like washing machines as well as DIY stores like Home Depot had been severely affected due to the crisis.

In 2007, economists predicted slowing down of the US economy since most of the US consumers spend beyond their income limit by borrowing credit, and hence any fall in value of homes would cause reluctance in continuing the same pattern in the future. They also said that the worse economic slowdown would occur mainly due to the cutting back on the availability of credit by Banks and lenders. As a result more and more applications for credit cards were rejected during 2007, putting pressure on huge deposits for purchasing homes and looking more closely at personal loan applications. The mortgage market was also badly affected as individuals found it difficult to get any non-traditional mortgages such as jumbo and sub-prime.

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