This caused a rise in mortgage defaults, as many new homeowners could not afford mortgage payments. These defaults also signaled the end of the US housing boom. US house prices started to fall and this caused more mortgage problems. For example, people with 100% mortgages now faced negative equity (Mortgage Guide). It also meant that the loans were no longer secured. If people did default, the bank couldn’t guarantee to recoup the initial loan.
The number of defaults caused many medium sized US mortgage companies to go bankrupt. However, the losses weren’t confined to mortgage lenders, many banks also lost billions of pounds in the bad mortgage debt they had bought off US mortgage companies. Banks had to write off large losses and this made them reluctant to make any further lending, especially in the now dangerous subprime sector (Shah).
The result was that all around the world, it became very difficult to raise funds and borrow money. The cost of interbank lending had increased significantly. Often it was very difficult to borrow any money at all. This affected many firms who had been exposed to the subprime lending. It also affected a wide variety of firms who now have difficulty borrowing money (Shah).
The slowdown in borrowing has contributed to a slowing economy with the possibility of recession in the US and all around the world.
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