U.S. Mortgage crisis,causes and effects.
Due to Mondays major crash on Wall Street that saw a record loss of 777 points, many are fearing they will loose their pensions as well.Pension funds get invested in various ways but the most popular and previously most advised manner was to invest the majority in ever changing stocks due to the potential for high return and then to invest the remainder in more stable ways that may show a lesser return on investment.
This is pretty scary when you remember that they were already concerned about the availability of pension funds due to other factors.
One might know there is a mortgage crisis but not know how it all started.From the information available apparently it started way back in 2006 when the U.S. housing bubble was broken.This means that properties in certain areas reached their very top price and then suddenly dropped in value leaving the owners of recently purchased property with negative equity.
Other contributing factors were a very high rate of defaulting on payments on subprime and adjustable rate mortgages,high risk lending and borrowing practices,a slow down in the housing market and of course super high corporate and individual debt.
So the borrowers couldn’t pay the lenders and the lenders lost billions.As of July’08 banks had reported losses of almost $440 billion.However the lenders encouraged the borrowers to take on unmanageable loans with incentives such as lower initial repayments that would increase over time.People owning second homes for investment or recreational purposes also reached record numbers,spreading the borrowers disposable income very thin.Then of course the interest rate went up causing many people to default on their payments.
The banks did try to assist each other but without much success,eventually the $700 billion rescue plan was proposed and rejected on 29 September 2008.The main reason for the rejection seems to be that the politicians were unwilling to risk their political future five weeks before the Presidential elections.
Hopefully South Africa can learn from this global financial crisis and develop better policies and better financial practices.
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