How Has the Crisis Spread

The boom on stock market after the Iraq war caused the chaos every one was buying and selling with higher risk than before, being less worried about the losses. The lowest interest rate since over 40 years which was equal to 1% generated a great demand for real estate. Almost 40% of borrowers in 2005-06  were people who weren't trustworthy, with no credit abilities. When the boom for real investment slowed down the prices of houses simultaneously went down as well. The rise of interest rates caused a lot of problems to Borrowers, paying back every time the higher rate plus principal was bringing great tention. The first interest rate rise accrued in June 2004 of 0,25%, but no one took it seriously. In 2005 there were 8 rises of interes rate, in June 2006 after 17 rises the velue of the interest rate reached 5,25%. In the result people couldn't balance the maintenance of the house plus leaving expenses with their revenues. The owners of houses started to sale them but on lower prices. The market values fell below the the level of mortgage loan outstandings. People couldn't pay back loans any more so the banks had to make huge provisions. In some extreme cases people were burning their houses to get back at least their insurance. In April 2007 one of the biggest subprime bank loaners went bankrupt ( nEw Century Financial). One of the biggest banks - Northern Rock in Uk almost went bankrupt.  Also the subprime loans we repacked by the financial institutions and sold to worldwide investors. They started to be worried because they bought the packages with lorisk rate ( AA and above ). Those investors first started to sale the packages but later were demanding the credit insurance ( Credit Life Insurance, companies insured their credits) the insurance companies had to pay to the house owners and to package holders. They reached the point where the crisis also spread among the insurance sector. The Crisis spread resulted in US$ currency fall and anxiety all over the world. Many of investors were from Europe and now within the countries they trie to block the crisis spread, even by rising interest rates in their own countries and drawing conclusions form USA mistakes. SUmming up lower economic growth in US is going to affect Europe and other continents in all ares of life, export and import between US and Europe slowed down because of the currency rates, and stable prices in Europe. The problem is now not only an economic problem but also got into politics world, with the president elections in the corner. 

United States Credit Crisis started few years ago, the country instability after 2001 created less demand for real estate, so the banks were forced to lower the loan interest rate. The recent meltdown in the mortgage market was created by slowdown in housing sales, which lowered the prices and banks adjusted their credit rates. The crisis, which is also called sub-prime crisis, has it roots in fall of house pricing. The second very important factor is adaptation of the new scoring technique. Thanks to this techniques banks were able to divide their borrowers into credit-worthy borrowers and set for them high-risk interest loan rates. In 2003-2006 interest rate was low, 20% of $3,2 trillion in facilitated home mortgages were consider sub-prime and most of its borrowers were those with poor credit histories at high interest rates. The American dollar inflation is caused by the dollar devaluation, which resulted in more instability in US economy, as well as in the mortgage market changes. The Americans are one of the larger importers of goods and have to pay more dollars for the same amount of imports. The money is going out of the country so the inflation is getting deeper. people who bought houses with combined loans and high-risk rates are facing a big problem right now. The interest rates are going up as their were stated high-risk so borrowers has to pay more each month and as well as prices of houses are still going down they cannot sell the properties with any profit but just with loss. Those losses can be even equal to tens of thousand dollars. The last barrier in this never ending chain is that the contracts with banks usually included the certain amount of time when the borrowers cannot sell houses. If the rules were broken he/she has to pay a penalty around $40,000. In thew conclusion if once you got into spin of the loan crisis it is impossible to get out of it without losing anything. The losses are considering both sides banks and borrowers because most of borrowers cannot afford to pay back money to the bank so the banks are also losing money (profit). This causes bankruptcy of many national and multinational banks.