Globalization of the U.S. Subprime Mortgage Crisis Essay

The U. S cuneus patriarchal owe Crisis stir up the world pecuniary foodstuffs. The economy of the United States of America could combat the owe foreclosures for its efficiency. The global investors were wary of the fact that the zep prime mortgage crisis is a symptom of roughly unknown problems that the US economy is suffering from. In 1994, an to the highest degree insignificant less(prenominal) than 5% of all the mortgages in the U. S were sub prime. still by 2005, the grade had risen drastically to 20%. Sudden changes in the banking system were responsible for this increase.Earlier, mainly commercial banks were employ to serving the American societies and they mainly offered fixed charge mortgages. In Detroit and in Boston this figure was 24. 6% and 15% respectively, whereas in California this figure was 14%. After a long period of stable matter to browses with only a small downward trend, the pass judgment started increasing. This reduced the demand for central o ffices and hence causing a decrease in home prices. thither was competition between the mortgage finance companies and mortgage brokers and the tralatitious banks in offering some new products.This growing competition produced a number of mortgage products and choices desire sub prime loan of incompatible varieties for the American consumers. Homeowners could non combat the increases in payments or redden transfer their homes because of market price depreciation. Almost 77% of the homes were overvalued in declamatory cities like California (Enoch & Charles, 2007). Causes of the current U. S sub prime mortgage crisis. There seems to a common consensus that periods of speedy quotation growth atomic number 18 go with by loosening bestow standards.The former Federal Reserve chairwoman Alan Greenspan pointed in his speech to the Independent Community jargoners of America in 2001 that at that place was an unfortunate tendency among bankers to lend aggressively at the peak of a cycle and noted that this aggressive kind of lending could result to wondering(a) loans. This consequently means that the realisation boom in America had a hand in causing the current sub prime crisis. hence more(prenominal) of the major banking crisis in the last a can a century occurred at times that there was an extremely fast credit growth.However not all credit booms ar immediately followed by a banking crisis. For instance in a study by Barajas et al (2007), of the 135 credit booms that were identified, only 23 of them preceded a systematic banking crisis with this symmetricalness increasing to 31 if the non-systemic episodes of financial distress atomic number 18 included. However almost half of the banking crisis were preceded by a credit boom. Larger and longer-lasting credit booms and those that select coincided with higher inflation and lower growth are more seeming to end up in a crisis.Booms associated with fast rising assets and echt estate prices are als o more presumable to lead to a crisis. The increase in home prices in early 2000 was completely fantastic and made the homeowners believe that home prices will continue increase and perplex future refinancing and subsequent mortgages quite profitable. The loose standards made them believe that in buying expensive homes than they could fox afforded with the traditional fixed rates loans and more expensive than they can afford now with their adaptable mortgage loans resetting. closely of the players in the mortgage market contributed to the crisis. Homeowners, brokers, lenders, rating agencies regulators, investors and central banks all contend a procedure in the crisis. The homeowners ran into flexible loans with no understanding of them and even some lied on stated income loan applications (Giang, & Anthony, 2007, p. 39). The lenders hurriedly offered riskier loans to borrowers as loan products with adjustable rates transfer great part of a risk from the lender to the borrowe r.This risk transfer is the reason was the main modify factor as to why the offered higher commission to brokers if they sold adjustable loan. Brokers were also controlled by greed and started offering adjustable mortgages to borrowers who would qualify for prime loans. However, lenders never expected such huge foreclosures and extreme flooring of household prices. Central banks and some other huge investors have experienced significant losses as a result of mortgage asset devaluation. The risk of commit in securities backed by mortgage never came to realization as should have been.The investor mainly relied on investment grade ratings applied to mortgage backed securities by rating agencies. Historical data backed models are mainly used by rating agencies to provide investment rating. Mortgage backed securities have excellent historical date whereas adjustable mortgage loans and their innovative variations universe new products on the mortgage market have no historical data. The regulators missed to prevent the crisis through legislation that would modulate higher lending standards. They can play a great role in prevention of an economic crisis (Eric, 2008).Global Spread of the U. S sub prime mortgage The recent volatility in the global financial markets due to the US sub prime mortgage has not spared banks end-to-end the world. In Saudi Arabia, banks have been able to absorb only nominal exposure to distressed loans. For instance, Saudi Basic Industries Corporations have faced some constraints. Superficially, the happenings of the global market seems little unaffecting to Saudi Arabia. However since the peaking of the US stock markets, the Tadawul All-share Index has been maintaining an upwards trend.For instance, strong demand meant that investors accepted a lower yield than previously indicated for a SABIC bond in the calendar month of July 2007. In this case, the bulk of demand came from Middle East and mainly from Saudi Arabia. Other bonds issu ed by the Gulf Cooperation council suffered and a greater caution could likely have had an impact on investor perceptions of Saudi Arabia risk. Higher credit rotate had increased the cost of borrowing even after taking into circumstance any reduction in the Federal funds rate.Even though the costs of borrowing were not high to deter borrowing, the prospect of payoff debt had deteriorated forcing the companies to revise their plans. This placed an opportunity to large Saudi investors who are not reliant on new or foreign borrowing and therefore were better positioned to acquire foreign assets, generally at lower prices than earlier to recent market moves. Saudi Arabia has been developing its mortgage market though the mortgage law is still to be approved, the housing finance patience is beginning to take off and there are loans available for homeowners to secure.However with the legal and regulatory infrastructure not in place, the crisis in the US has slowed the growth. The cri sis in the US also hit demand and thus prices for other commodities produced by Saudi Arabia such as plastics. Lastly, due to the exchange rate peg, the interest rates were cuts further and this further the riyal weakened on with the dollar (Gerry & Paul, 2007). European country such as the United country and Spain faces an even larger housing problem as lenders are comme il faut more cautious. This implies that consumer spending in Europe is also experiencing the crunch of the US sub prime crisis.The current slowdown impacts on all part of the chemical industry as housing is a key fount of chemical demand. Sectors that directly supply the housing and automotive sector in the West are hardest hit. In the United Kingdom, though there are different circumstances, the effect of the US sub prime mortgage crisis are being experienced. First, there are fewer mortgages given to people of less credit worthiness compared to the other mortgages in the market in the UK whereas in the US th is proportion is significantly large.In addition, about half of the borrowers in this proportion of sub prime mortgage in the UK do not have a history of significant payment problems. Secondly, the interest rates in the UK have been relatively stable compared to the US where there had been rapid rises in interest rates. Thirdly, in the UK, the house prices have been booming compared to the Us where the house prices have been decreasing leaving borrowers mired in controvert equity and unable to sell their homes in order to service their loans.Finally, the lending criteria in the UK are much stricter than in the US that have been loose. However, condescension all these the effect of the US sub prime mortgage crisis is being felt in the UK with the Bank of England taking a warning of thus dangers of bailing out institutions that had taken reckless lending decision for profits. It also leads to the Bank of England cutting interest rates at the start of 2008. The US sub prime mortgage crisis has an impact on the Germany economy where the hardest hits are the German banks.The Industrial bank in Germany managed a fund that had invested in credit portfolios, which included US sub prime real estate loans. job bank, which is the second largest bank in Germany, reported that the US subprime mortgage market had cost it 80 million euros in the second and last quarter of the financial year 2007. In the financial years 2007/2008, IKB expects that the crisis will ferment negatively on its projected earning of 280 euros (Christopher, 2008).References Christopher B. L. (2008). The Next Slum, The Atlantic Monthly.New York Oxford university press. Enoch and Charles. (2007). Rapid ontogenesis in Credit Endless Boom or EarlyWarning? New York transnational Monetary Fund and Palgrave. Eric Janszen. (2008). The next bubble The markets for tomorrows big crash. London Harpers press. Gerry, G. & Paul, F. (2007). A House of Cards from fantasise finance to global crash. London Lupu s Books. Giang, H. and Anthony. (2007). The Varying Effects of Predatory alter Criteria on Mortgage Applications, Reserve Bank of St. Louis Review 89(1), pp. 39-59.