Subprime mortgage crisis - part II

International banks which invested in mortgage market suffered horrible losses. As the confidence in the system began to shatter, several key events happened. Among the first to sense the impact were the government-sponsored enterprises Fannie Mae and Freddie Mac. They failure send warning to the entire banking industry that no one is too big to fail. When respected financial institution Lehman Brothers failed in September 2008, the negative spiral began to spread more quickly and the crisis hit the turning point. Panic occurred in the stock markets, causing stock prices to crash. Combination of numerous negative events led to the global credit freeze. Important institutions such as FED, ECB and IMF intervened in order to minimize the damage. However, we can still sense the aftermath of the subprime mortgage crisis even today. Find out more information here.

Subprime mortgage crisis

As you could have learned from earlier posts, most of the economic crises start in good times when greed and speculation prevail over the common sense. In March 2007, the United States sub-prime mortgage market witnessed higher-than-expected home foreclosure rates which started a collapse forcing more than 25 sub-prime lenders to declare bankruptcy. Were the expectations wrong? No doubt. While securitization of mortgage market attracted large quantities of money, it allowed banks to basically sell the mortgages thus distributing credit risk to investors. Since risk could be transferred banks allowed more loans than usual, constantly lowering the criteria. Eventually, people who normally wouldn't be able to purchase a home started refinancing their new ventures through mortgages. But when the home prices started to fall, old bills resurfaced and the entire market was shocked with the numerous foreclosures. Bubble burst caused a loss in trillions of dollars, brought the financial sector to the edge of the cliff and created the seed for the global scale crisis. Read more information about the Subprime mortgage crisis critical events here.