Now a days, when you on any local or international News Chancel, in the headline and news, mostly discussion is about the current financial crisis.In all newspapers, main business headlines are that stock market is falling, decreasing industrial production, unemployment is rising , due to recession many multinational big banks are going bankrupt
So what has reasoned behind this major economic change in the world? So today I shell try to explain this economic recession for those people who cannot understand complex economic language.
If we want clearly understand how world economy failing downward. we need to conceder past when housing sector of US is booming. its economy was at highest level. . Due to low interest rates and large inflows of foreign investment make easy credit conditions. So it is very easy for people to take home loans. and more people took home loans, the demands for property increased and home prices also increased. and there was enough money to lend to potential borrowers, the loan institutions started to increased their loan disburse and relaxed the loan term & conditions. The loan officer were struggling to find more potential home buyers. Since it was a good time and property prices were on sky, mostly lending agencies and mortgage firms were struggling to give loans to as many potential customers as possible. Since mostly home buyers was motivated by the greed factor when the housing prices regularly increasing, At that time big lending institutions done a big mistake they ignored repaying capacity of customers. As a result, many home buyers with low income and bad credit history were unable to repay loan when recession started. These loans were called as sub-prime loans (the capacity of repaying of the borrowers was doubtful).
At that time value of property regularly increased, and mostly home buyer used the increased value to reinvest again in property sector because of low interest rate they take another Mortgages The lending companies also convinced borrowers with attractive loan conditions where interest rate for an initial period were low (known as adjustable rate mortgage) (RAM), Eventually home prices to decline beginning from the summer of 2006 due to surplus inventory of homes. Overbuilding of house during the boom period finally causing to decline in property value of the USA. Investors began default on home loans. An estimated 8.8 million homebuyer (10.8% of total homeowners) had zero or negative equity as of March 2008.mean that their homes value less then their Mortgage.
Foreclosures (to take back property that was bought with borrowed money because the money was not being paid back as formally agreed) presses started in the United States in late 2006 Home owners were unwilling for foreclosures many of them to sell their homes at reduced market prices significantly supply increased of housing inventory new homes sales dropped by 26.4% in 2007 as compare to 2006. Nearly four million unsold existing homes were for sale including nearly 2.9 million new homes. Due to this increased supply of home inventory placed downward pressure on prices because of prices declined more homes buyer were at risk of default and foreclosure.
Continue…..
UPDATE
Keep reading my blog
I will update this post as soon as possible and Introduce you Global banks and brokerages firms(Lehman Brothers/ Citigroup/ Merrill Lynch ) Large financial entities and discuss how they suffered by subprime loans.
Note: This and my upcoming posts are more beneficially for new student of Forex. This study give you a basic idea of fundamental factors, and you can learn how they impacts on currency market.