It all started in the last decade when an economic bubble was created through constant rising housing prices. The term “economic bubble” is used to characterize trade in high volumes at prices that are considerably at variance from contained value, this specific one is known as the housing bubble.
Furthermore high default rates on Subprime and many other mortgage loans, convinced many people to take higher risks. Three primary risks were involved in this crisis: the credit risk, the Asset risk and the liquidity risk. The combination of these three factors made it pretty much impossible to pay back the debts created by the declining home-prices.
Looking back, we can nowadays say that the increase in prices of housings was completely unrealistic.
As already said, investors believed in the possibility of future re-finance as the price growth seemed constant and decided to take more important credits, to purchase greater accommodations.
But not only the investors found themselves mouse trapped, also did the lenders. These were prompt to offer these riskier loans, as they believed in the continuous rise in housing value.
These graphs illustrate how the crisis evoluated since 1998, and finally became global in 2007. In 2007 neither home buyers, nor the lenders could afford to pay the incredibly high prices anymore and the money-flow broke down (see graph 1).
Basically too much loans were given, but none of the money was returned. That is when the housing crunch became a global financial crisis, which now threats to affect the whole economy. The widespread dispersion had a main impact on everyone involved. Investors as well as lenders are facing debts and bankruptcy.
The government’s role now, is to do whatever it takes in order to stop the crisis, by saving peoples homes, but mainly prevent them from an eviction from those.
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