Impact of US Credit Crunch on Global Economy - Essay Example

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Impact of US Credit Crunch on Global Economy

Lenders were also looking for borrowers even with lesser creditworthiness but new house buyers. Interest rate was already slashed from 5% to 0.75% in 11 installments. They were ready with exotic offers such as 'interest only' loans or 'option adjustable rate' mortgage (option ARMs). These loans were attractive because of low down payment but later the payment was to skyrocket. Banks wrote in average1% of option ARMs all mortgages in 2003 that went up to 15% by 2006. In certain American communities the option was one in every three mortgages written. By 2006 brokers were accountable for 80% of all mortgages originated. Brokers advocated hard for the option ARMs because that was highly profitable for banks and high commission fetching for the brokers. Banks had another advantage to bundle up many mortgages to sell them to investment funds; hedge funds, which used these as collateral for highly leveraged loans. The mortgages bundles were highly unregulated and not properly verified for credit worthiness. Investors who were holding these mortgage- backed bonds were at risk of losing high as a result of home loans given to people with poor credit profile. ...Show more

Summary

The credit crunch in USA is sparked by sub-prime mortgage in which loans for housing were sanctioned by banks to large number of borrowers having shady credit worthiness, which ran the highest risk of defaulting. When the crisis occurred depositors ran to bank in London to withdraw their money, warned the construction company to stop construction and cautioned economists about the shrinking prospect of the economy…
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Impact of US Credit Crunch on Global Economy essay example
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