| One of the biggest questions being asked in | | | | seems like a simple solution could have been |
| America at the moment relates the fall out of the | | | | found that would have kept everyone happy, it is |
| sub-prime lending market. Mortgage providers in | | | | unfortunately not that simple. Even though |
| the States have sold products to people who | | | | interest rates were increasing, mortgage lenders |
| were in receipt of lower incomes. | | | | could not keep them low for the sub-prime |
| This was no problem while the economy was | | | | market, because for most of them, it wasn’t |
| buoyant but changes in the financial markets led | | | | their money that they were lending. |
| to interest rates being put up, which in turn made | | | | The process in America is that banks ask all |
| it increasing difficult for these people to meet the | | | | potential customers to qualify for a loan. Once a |
| higher repayment charges. This resulted in an | | | | number of customers had passed the test, their |
| ongoing series of mortgage defaults followed by | | | | loans would be buddled together and shown to a |
| the foreclosure on hundreds of properties. | | | | number of investors. The investors would then |
| Suddenly the banks, who want to stem the loss, | | | | agree to buy that portfolio based on the |
| started to reconsider who they were lending to | | | | predicted return that they would be getting. This |
| and what financial products they were happy to | | | | process is known as securitisation and means that |
| lend. Less people were then able to get credit and | | | | the mortgage lender does not actually own the |
| remortgage which led to a credit crunch which | | | | money it lends out but has effectively sold the |
| quickly spread across the globe. | | | | mortgages to other investors who put up the |
| The question being asked is why was this all | | | | money and expect a return. |
| allowed to happen. When it became clear that | | | | When market conditions change and investors are |
| people were unable to afford their mortgages | | | | less plentiful, it becomes more difficult to find the |
| why did the banks not reduce their rates. Why | | | | investors to pay the money. Therefore rates |
| continually increase the repayments for people | | | | need to go up to ensure the deals are made. The |
| who the lenders know could not afford it? Surely | | | | mortgage lenders on the front line cannot reduce |
| it would have been better to keep the rates low | | | | the amount of interest they are charging because |
| and the money coming in, than increase the rates | | | | of the deal they have made with the investors, |
| and risk non-payment. Banks are showing loses | | | | so there is no choice but to hope those who took |
| billions of dollars due to foreclosures, it is hard to | | | | out the mortgage can afford to pay it back. |
| think that it would not be cheaper for them to | | | | When they can’t, everyone loses out and |
| try and avoid the situation with lower rates. | | | | that is what has led us to the current situation. |
| The answer to this question is complex. While it | | | | |