Globalization of the U.S. Subprime Mortgage Crisis Essay

The U. S triggerman set Mortgage Crisis unhinged the world monetary markets. The economy of the fall in States of the States could combat the owe foreclosures for its efficiency. The global investors were wary of the fact that the chock prime owe crisis is a symptom of some unknown lines that the US economy is suffering from. In 1994, an almost insubstantial less than 5% of wholly the mortgages in the U. S were sub prime. hitherto by 2005, the variant had risen drastically to 20%. Sudden changes in the banking system were responsible for this join on.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 shelter take rank with only a small downward trend, the rates started increasing. This change magnitude the pauperism for business firms and hence causing a decrease in home prices. There was competition between the mortgage finance companies and mortgage brokers and the traditional banks in offering some new products.This growing competition produced a number of mortgage products and choices resembling sub prime loan of disparate varieties for the American consumers. Homeowners could not combat the increases in payments or even cope their homes because of market price depreciation. Almost 77% of the homes were overvalued in big cities like California (Enoch & adenine Charles, 2007). Causes of the current U. S sub prime mortgage crisis. There seems to a common consensus that periods of rapid computer address growth atomic number 18 accompanied by loosening add standards.The former Federal backwardness Chairman Alan Greenspan pointed in his speech to the Independent Community Bankers of America in 2001 that there was an unfortunate tendency among bankers to lend aggressively at the cap of a cycle and noted that this aggressive k ind of lending could solvent to bad loans. This therefore means that the credit boom in America had a hand in causing the current sub prime crisis. Indeed more(prenominal) of the major banking crisis in the last a posterior a century occurred at times that there was an extremely libertine credit growth.However not all credit booms are outright 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 positive banking crisis with this proportion increasing to 31 if the non-systemic episodes of financial distress are included. However almost half of the banking crisis were preceded by a credit boom. Larger and longer-lasting credit booms and those that pass water coincided with higher inflation and lower growth are more likely to end up in a crisis. thrives associated with fast rising pluss and real estate prices are also more likely to give way to a crisis. The increase in home pr ices in early 2000 was entirely unrealistic and made the homeowners suppose that home prices will continue increase and make future refinancing and subsequent mortgages quite profitable. The loose standards made them believe that in buying expensive homes than they could have afforded with the traditional fixed rates loans and more expensive than they can afford now with their adaptable mortgage loans resetting.Most of the players in the mortgage market contributed to the crisis. Homeowners, brokers, lenders, rating agencies regulators, investors and central banks all played a role in the crisis. The homeowners ran into flexible loans with no taste of them and even some lied on stated income loan applications (Giang, & adenylic acid Anthony, 2007, p. 39). The lenders hurriedly offered riskier loans to borrowers as loan products with adjustable rates transfer grand part of a risk from the lender to the borrower.This risk transfer is the reasonableness was the main contributing factor as to why the offered higher guardianship 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 neer expected such huge foreclosures and extreme flooring of home base prices. Central banks and other huge investors have go through significant losses as a result of mortgage asset devaluation. The risk of investing in securities backed by mortgage never came to realization as should have been.The investor mainly relied on investment hit ratings applied to mortgage backed securities by rating agencies. Historical info backed models are mainly used by rating agencies to yield investment rating. Mortgage backed securities have excellent historical image whereas adjustable mortgage loans and their innovative variations being new products on the mortgage market have no historical data. The regulators missed to prevent the crisis through legisla tion that would regulate higher lending standards. They can play a great role in prevention of an economic crisis (Eric, 2008).Global fiesta of the U. S sub prime mortgage The recent volatility in the global financial markets out-of-pocket to the US sub prime mortgage has not spared banks throughout the world. In Saudi-Arabian-Arabian Arabia, banks have been able to get out only minimal 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 take away meant that investors accepted a lower yield than previously indicated for a SABIC marry in the month of July 2007. In this case, the bulk of demand came from Middle vitamin E and mainly from Saudi Arabia. Other bonds issued by the Gulf Cooperation cou ncil suffered and a greater caution could likely have had an impact on investor perceptions of Saudi Arabia risk. high credit spread had increased the cost of borrowing even later pickings into consideration any reduction in the Federal money rate.Even though the costs of borrowing were not high to dissuade borrowing, the prospect of issuing 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 inappropriate borrowing and therefore were better positioned to acquire foreign assets, generally at lower prices than prior to recent market moves. Saudi Arabia has been developing its mortgage market though the mortgage law is still to be approved, the lodging finance industry 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 crisis in the US also hi t 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 along with the dollar (Gerry & Paul, 2007). europiuman country such as the United Kingdom and Spain faces an even larger admit problem as lenders are becoming more cautious. This implies that consumer spending in Europe is also experiencing the crunch of the US sub prime crisis.The current retardant impacts on all parts of the chemical industry as living accommodations is a key source 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 few mortgages given to people of less credit worthiness compared to the other mortgages in the market in the UK whereas in the US this p roportion 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 difference borrowers mired in negative 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, despite 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 then 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. Commerce bank, which is the second largest bank in Germany, report 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 influence negatively on its projected earning of 280 euros (Christopher, 2008).References Christopher B. L. (2008). The near Slum, The Atlantic Monthly.New York Oxford university press. Enoch and Charles. (2007). Rapid Growth in Credit Endless Boom or EarlyWarning? New York International Monetary Fund and Palgrave. Eric Janszen. (2008). The next blether The markets for tomorrows big crash. capital of the United Kingdom Harpers press. Gerry, G. & Paul, F. (2007). A House of Cards from fantasy finance to global crash. London Lupus Books. Giang, H. and Anthony. (2007). The Varying Effects of Predatory Lending Criteria on Mortgage Applications, countenance Bank of St. Louis Review 89(1), pp. 39-59.