Description

In my book I analyzed what caused the U.S. subprime
mortgage market meltdown and why this triggered a
global credit crunch. In the years before rising
house prices, favourable market conditions and a
well-defined channel of financial intermediaries
drove the expansion of the U.S. subprime mortgage
market. The result was that borrowers with shaky
credit history who did not satisfy standard
underwriting criteria obtained loans, which was
praised as innovation. Subprime mortgage loans were
packed into complex bundles of securities and sold to
investors all around the world. In 2006, thousands of
homeowners became delinquent and defaulted on their
mortgage payments when the housing bubble was
bursting and interest rate reset to higher levels
because they could only afford the initial teaser
rate of their hybrid adjustable rate mortgages.
Unknown exposure dried up the demand for
mortgage-related securities. Banks had to write down
billions of dollars because of losses of
subprime-related securities and some of them were
bailed out. Fears and uncertainty caused a crisis of
liquidity and confidence, a global credit crunch in
financial markets and a sell of on equity markets.