The spread of the credit crisis

When the “housing bubble” proved constant growth, it was only a matter of time until the crisis would spread and other parts of the economy would be affected.

Since September 2007 the housing prices remained stagnant or fell. This basically means that the longer the situation remains this way, the greater will be the penalty to our future economic growth. In order to stop the Spread, Countries, Banks and other Companies, pass legislations, funding in order to support the mortgage counselling and help homeowners refinancing during this difficult period.

In December 2007, sales volume of new homes dropped by nearly 30%, compared to the previous year, this is why at the start of 2008, and the inventory of unsold new homes was at its highest level since 1981, counting nearly 10 %!
Anyhow, prices are expected to keep on declining until this excess of supply is reduced. Prices have to be stabilized in order to stop the crisis from keeping on spreading.




To start with, we have to underline the fact that if the decline of new home construction as well as the demand of housing products won’t come to an end in the nearest future, we’ll face an enormous risk of recession and stagnation if not even a fall in GDP growth.
What is important now is to focus on the re-balance concerning supply and demand of the housing market.

Moreover, financial institutions suffer a lot, as they’re primary affected by the spiralling mortgage and credit crises; banks face bankruptcy and incredibly increasing debts. In addition to this the entire financial system was threat to collapse due to a lack of transparency on parts of the market.
In order to illustrate this we could take the example of NetBank, a pioneer in Internet banking, filed for bankruptcy protection after the savings-and-loan became failed at the end of 2007. The filing in U.S. Bankruptcy Court by NetBank Inc. listed assets of $87.2 million and debts as high as $42.4 million. Federal law prohibited the savings-and-loan subsidiary from filing for bankruptcy protection from creditors like its.
This is basically why federally chartered banks cannot be reorganized and must be liquidated by the FDIC.
The bank's failure in 2007 was the result of margin compression from an inverted yields curve, fewer mortgage originations and demands to repurchase delinquent loans.
But not only banks, mortgage lenders, real estate investment trusts (REIT), and hedge funds suffered significant losses as a result of mortgage payment defaults or mortgage asset devaluation, also did stock markets and insurance companies.

Furthermore, the economy and the financial markets need to be very careful in order to prevent the liquidity crunch from spreading even further. The expansion of the crisis made the demand for MBS decline and risk premiums increase, which now led to reimprovement concerning self-regulations as well as litigation.

But not only companies are affected, the ones who suffer most are the home owners themselves, as they took large credits, and all they’ve left now is an incredible amount of debts. Additionally to the social and personal disappointment, the increasing mortgage is the main reason why homeowners are now confronted to foreclosure.

To end up with, what we can say is that this incredible bursting of the housing bubble has set in motion such a large number of economic forces, that could bring a recession in the world economy as a whole.