1. The concept of subprime mortgage crisis

The subprime mortgage crisis is also called the subprime mortgage crisis, also translated as the subprime debt crisis. It refers to a storm that occurred in the United States due to the bankruptcy of subprime mortgage lenders, the forced closure of investment funds, and the violent fluctuations in the stock market. It has caused a looming illiquidity crisis in major global financial markets. The "subprime mortgage crisis" in the United States began to gradually emerge in the spring of 2006. In August 2007, it swept the world's major financial markets such as the United States, the European Union, and Japan.

2. The emergence of the subprime mortgage crisis

The direct cause of the storm in the US subprime mortgage market is the rise in interest rates and the continued cooling of the housing market in the United States. Subprime mortgages are loans provided by some lenders to borrowers with poor credit and low incomes.

Rising interest rates have led to increased repayment pressure. Many users with poor credit feel that repayment pressure is high, and there is a possibility of default, which may have an impact on the recovery of bank loans.

2.1. Principle

The direct cause of the storm in the U.S. subprime mortgage market is the rise in interest rates and the continued cooling of the housing market in the United States. Subprime mortgages are loans provided by some lenders to borrowers with poor credit and low incomes.

The U.S. subprime mortgage market usually adopts a repayment method that combines fixed interest rates and floating interest rates, that is, home buyers repay the loan at a fixed interest rate in the first few years after purchasing the home, and then repay the loan at a floating interest rate thereafter.

In the five years before 2006, due to the continued prosperity of the U.S. housing market and the low interest rates in the United States in previous years, the U.S. subprime mortgage market developed rapidly.

With the cooling of the U.S. housing market, especially the increase in short-term interest rates, the repayment interest rates of subprime mortgage loans have also increased significantly, and the loan repayment burden of home buyers has greatly increased. At the same time, the continued cooling of the housing market has made it difficult for homebuyers to sell their homes or refinance their mortgages. This situation directly led to a large number of subprime mortgage borrowers being unable to repay their loans on time, thus triggering the "subprime mortgage crisis."

2.2. Popular answer

In the United States, loans are a very common phenomenon, from houses to cars, from credit cards to phone bills, loans are everywhere. Locals rarely buy houses with full payment and usually take out long-term loans. But we also know that unemployment and re-employment are very common here. How can these people with unstable or even no income buy a house? Because their credit rating does not meet the standard, they are defined as subprime credit borrowers, or subprime borrowers for short.

Due to the high house prices in the past, banks believed that although they had lent money to subprime credit lenders, if the borrowers were unable to repay the loans, they could use the mortgaged houses to repay the mortgages, auction or sell them to recover the bank loans. However, due to the sudden drop in house prices and the borrower's inability to repay, the bank sold the house, but found that the funds obtained could not cover the loan interest at that time, or even the loan amount itself, so the bank would suffer a loss on this loan.

It’s okay if one or two borrowers have such a problem, but due to the rising interest rates on installment payments and the fact that these borrowers themselves are subprime credit lenders, this has resulted in a large number of people who are unable to repay their loans. Lender. As mentioned above, banks repossessed houses but could not sell them at high prices, resulting in large losses and triggering the subprime crisis.

3. The outbreak of the subprime mortgage crisis

On February 13, 2007, New Century Finance issued a profit warning for the fourth quarter of 2006.

HSBC Holdings has increased bad debt provisions by US$1.8 billion for its U.S. subprime mortgage business.

Facing $17.4 billion in debt pressure from Wall Street, New Century Financial Corp, the second largest subprime mortgage company in the United States, announced on April 2 that it would file for bankruptcy protection and lay off 54 people. of employees.

On August 2, Deutsche Bank announced a profit warning, and later estimated a loss of 8.2 billion euros, because one of its 12.7 billion euros is the "Rhineland Funding" and The bank itself had a small involvement in the U.S. real estate subprime mortgage market and suffered huge losses. The Bundesbank convened the country's banks to discuss a basket plan to rescue Deutsche Bank.

American Home Mortgage Investment Corporation, the tenth largest mortgage lender in the United States, officially filed for bankruptcy protection with the court on August 6, becoming another large mortgage lender in the United States to file for bankruptcy after New Century Financial Corporation. .

On August 8, Bear Stearns, the fifth largest investment bank in the United States, announced the collapse of two of its funds, also due to the subprime mortgage crisis.

On August 9, BNP Paribas, France’s largest bank, announced the freezing of three of its funds, also because they suffered huge losses from investing in U.S. subprime mortgage bonds. The move sent European stock markets plunging.

On August 13, Mizuho Group, the parent company of Mizuho Bank, Japan’s second largest bank, announced losses related to U.S. subprime mortgages of 600 million yen. Japanese and Korean banks have already incurred losses due to the U.S. subprime mortgage crisis. UBS Securities Japan estimates that Japan's nine largest banks hold more than 1 trillion yen in U.S. subprime mortgage-backed securities. In addition, five Korean banks, including Woori, invested a total of US$565 million in secured debt obligations (CDOs). Investors are worried that the U.S. subprime mortgage problem will have a strong impact on global financial markets. However, Japanese analysts are convinced that the vast majority of CDOs invested by Japanese banks have the highest credit ratings, and the impact of the subprime mortgage crisis will be limited.

Citigroup also announced later that losses caused by subprime mortgages in July amounted to US$700 million. However, for a financial group with an annual profit of US$20 billion, this is only a small amount.