(A) blind reduction of loan conditions among lending institutions and vicious competition have planted the seeds of crisis. In order to continuously expand market share in the fierce competition, many lending institutions have lowered the credit threshold for all borrowers. Many lenders began to provide subprime mortgages to borrowers with low credit ratings. Driven by interests, some sub-prime mortgage companies started more radical credit expansion, and even introduced loan methods such as "zero down payment" and "zero documents" without checking income and assets. Lenders can buy houses without funds, only need to declare their income, and do not need to provide any proof of repayment ability. Some loan companies even fabricated false information to get the loan application of unqualified borrowers passed. In this case, "marginal lenders" who could not borrow money or so much money were lured in.
(2) After inflation, the real estate market continues to cool down, making it difficult for buyers to sell their houses or obtain new financing through mortgage loans. Since the economic downturn in the United States in 2000, the Bush administration has encouraged people to buy houses with low interest rates and tax cuts, which has gradually led to a wave of rising asset markets targeting housing. From 2000 to 2006, house prices in the United States rose by 80%, the highest increase in history. However, since 2006, the American real estate market has gradually shown signs of cooling, and house prices have continued to fall. When the real estate price keeps rising, lenders and borrowers think that if it is difficult to repay the loan, the borrower only needs to sell the house or re-mortgage the loan. But in fact, once the whole housing market is expected to reduce its price, it is difficult for borrowers to sell their houses again, and the value of the houses may fall to the point where they are not enough to repay the remaining loans. Once overdue repayment and foreclosure increase significantly, the secondary market may be severely impacted and spread to the entire mortgage market.
(3) Continuous interest rate hikes have increased the repayment burden of buyers. After the American economic recession, the Federal Reserve cut interest rates sharply, which stimulated consumers' desire to borrow. However, from June 2004 to June 2006, the Federal Reserve raised the interest rate level 17 times in a row, and the benchmark interest rate was adjusted from 1% to 5.25%, which led to the continuous increase in the interest rate of subprime mortgage with floating interest rate, the borrower's repayment burden gradually increased, and the repayment pressure increased rapidly. In the case of overwhelming, a large number of breach of contract appear. Many borrowers, especially those with "sub-prime credit", such as odd jobs, new immigrants and young single mothers, are now facing the dilemma of not being able to pay interest, let alone repay the principal, so the default rate in the mortgage market is rising.
(D) High-risk mortgage product innovation contributed to the formation of the mortgage market bubble. When American subprime mortgage was launched in 2003, it was considered as a great financial innovation, because it realized the dreams of those who did not have enough financial resources to buy a house and had poor credit. Driven by the "innovative spirit" of many sub-market loan companies, a large number of new mortgage products have emerged. The common feature of these loans is to reduce the loan interest rate at the beginning of the loan. Generally, in the first few years of repayment, the monthly mortgage repayment amount is very low and fixed. After a certain period of time, the repayment pressure increases sharply. Many short-term real estate speculators with "high credit quality" believe that house prices will only rise in the short term, and they will have time to cash out. There are also many people with "average credit" who use this kind of loan to pay for houses far beyond their actual ability to pay. But when house prices are flat or falling, these loans may become high-risk varieties, and there will be a funding gap and bad debts.
(V) The risk of secondary market transfer of subprime mortgage loan has not been completely transferred, and all stakeholders have suffered losses. The secondary mortgage market has expanded the scale of financial companies and other secondary mortgage companies in the new century, but the residual risks in the process of securitization eventually led to the bankruptcy fate of the companies. For it, incomplete securitization can be described as "Xiao He succeeded and Xiao He failed". This is because after the securitization of mortgage loans, the links between industries are more inextricably linked. Mortgage companies sell their mortgages to banks, which repackage them into mortgage securities and then sell them to investors to spread risks. But at the same time, banks will also sign agreements with mortgage companies, and if individual borrowers default, banks must buy back mortgage loans. In this case, the risk of the sub-prime loan company has not been completely transferred out.
So this year's financial crisis.